ACCEPTANCES 


NEW  YORK 


ACCEPTANCES 


Their  Importance  as  a  Means  of  Increasing 

and  Simplifying  Domestic  and 

Foreign  Trade 


With    a    Digest    of    the    Amendments    to    the    Federal 

Reserve  Act,  Regulations  of  the  Federal  Reserve 

Board,  the  United  States  Warehouse  Act,  the 

Edge    Export    Finance    Act,    and    the 

Federal    Bill    of    Lading    Act. 


FOURTH  REVISED  EDITION 
August  15,  1921 


Prepared  and  Issued  by 
The  American  Exchange  National  Bank 


Broadway 

at 
Cedar    St. 


NEW  YORK 


COPYRIGHTED,    1921 
THE    AMERICAN    EXCHANGE    NATIONAL    BANK 


V 


^^ 


New  York,  August  15,  1921. 

npHE  monograph  on  Acceptances  which  was  pre- 
-■■  pared  and  first  issued  by  this  bank  in  April,  1916, 
revised  in  December  of  that  year,  in  June,  1918,  and 
again  in  April  of  the  present  year,  attracted  such  wide 
attention,  and  was  so  favorably  received,  that  it  is  our 
intention  to  continue  to  take  an  active  part  in  keeping 
this  important  subject  before  the  business  community. 

With  this  object  in  view,  we  herewith  present  a 
fourth  revised  edition  of  the  Acceptances  booklet,  giv- 
ing additional  amendments  to  the  Federal  Reserve 
Act  and  the  latest  regulations  of  the  Federal  Reserve 
Board,  affecting  Acceptances,  as  well  as  an  analysis 
of  the.  Edge  Export  Finance  Act  and  a  digest  of  the 
United  States  Warehouse  Act  and  the  Federal  Bill 
of  Lading  Act. 

The  American  Exchange  National  Bank, 

Lewis  L.  Clarke,  President. 


FOREWORD 


IN   presenting  the   subject   of  Acceptances   for  the   consideration  of  the 
business   interests   of   the   United   States,   we   do   so   with   a   feeling  of 
pride  in  the  part  that  this  bank  has  played  in  the  commercial  develop- 
ment of  the  nation. 

The  American  Exchange  Bank  was  organized  in  1838,  antedating  by 
many  years  the  National  Banking  System.  In  1865,  it  was  converted  into 
a  National  bank,  and  was  one  of  the  first  banks  to  enter  the  Federal 
Reserve  System. 

George  S.  Coe,  who  served  as  president  of  this  bank  from  1860  to  1894, 
clearly  foresaw  the  time  when  material  changes  in  our  banking  system 
would  be  needed.  In  1881,  Mr.  Coe  predicted  the  change  from  bond-secured 
currency  to  currency  secured  by  commercial  assets,  and  then  declared  that, 
after  all,  the  latter  was  the  most  natural,  useful  and  reliable  basis.  He 
also  said: 

"The  condition  of  a  bank  is  soundest  and  its  power  most  effective  when 
its  assets  are  composed  of  notes,  drafts  and  obligations  of  the  people — the 
title  deeds  to  those  commodities  or  articles  most  demanded  for  the  sub- 
sistence and  necessities  of  men,  and  for  their  comfort  and  convenience — 
together  with  a  due  proportion  of  ready  money,  into  which  all  these  things 
are  exchangeable. 

"Commercial  banks  are  the  oldest  and  safest  financial  institutions  in  the 
United  States,  or  in  the  civilized  world.  They  have,  in  all  nations,  outlived 
the  changes  of  the  governments  that  formed  them,  and  they  have  uniformly 
given  support  to  States  in  their  greatest  emergencies,  rather  than  received 
it,  because  commercial  banks  are  the  embodiment  and  the  reservoirs  of  the 
active  industrial  power  of  the  people.  Always,  they  are  greater  than  the 
State  itself." 

The  American  Exchange  National  Bank,  having  at  all  times  taken  an 
active  interest  in  the  commercial  development  of  the  country,  desires  to  do 
its  utmost  to  encourage  the  use  of  Bank  and  Trade  Acceptances  in  the  United 
States,  because  it  believes  that  their  general  employment  will  add  materially 
to  the  prosperity  of  the  individual,  as  well  as  to  the  prosperity  of  the  nation 
itself. 

THE  AMERICAN  EXCHANGE  NATIONAL  BANK. 

—  3  — 


INDEX 


I.    Credit  Functions  and  Instruments ,      7 

Acceptance  an  Important  Credit  Instrument 
Trade  Acceptance  Defined 
Acceptances   Differ   from   Notes  and  Drafts 
Fundamental  Purpose  of  Acceptances 

11.    The  English  Credit  System 11 

"Dollar  Exchange"  and  Sterling 

England's  Position  in  International  Banking 

The  London  Money  Market 

Theory  of  the  English  System 

Classes  of   English  Bills 

British  Banks  Governed  by ,  Traditions 

Documentary   Bills   or  Drafts 

Safeguards  of  English  Banks 

Advances  on  Consignments' 

Other  Methods  of   Financing  Shipments 

III.  German  and  French  Systems  Outlined 18 

Operations  of  the  Reichsbank 

Bank  Acceptances  in   Germany 

Financing  Germany's   Overseas   Trade 

Bills  of  Exchange  in  France 

Acceptances   Replace  Open   Accounts  Abroad 

IV.  The  American  Credit  System 23 

Cash   Settlement   of   Bills 

Some  Drawbacks  of  Cash  Discounts 

Claims  Arising  in  Settlement  of   Bills 

Use  of   Single-Name  Paper 

Single-Name   Paper   Replaces   Merchandise   Notes 

V.    The  Advantages  of  Acceptances 27 

Question  of  Qerical  Work  "^ 

Matter  of   Collection  Charges 

Credit  Facilities  Increased  by  Acceptances 

Cash  Discounts   and   Acceptances 

Acceptances  Not  Detrimental  to  Credit  System 

Result  of  Unwarranted  Expansion 

Trade  Acceptance  Aid  to  Sound  Banking 

—  4  — 


INDEX— Continued 


CHAPTER 


pact; 
32 


VI.     Developing  the  Market  for  Acceptances 

Report  of  New  York  Federal  Reserve  Bank 
Acceptances  Benefit  Both   Buyer  and   Seller 
General  Use  of   Acceptances   Urged 
Broadening  the  Market  for  Acceptances 
Growth  of  Acceptance  Operations 

VII.     Amendments  to  the  Federal  Reserve  Act 38 

Banks  May  Now  Accept  in  Domestic  Transactions 
Authorized   Collateral  for  Reserve   Bank  Advances 
Possibilities   for   Extension  of   "Dollar  Exchange" 
Establishment  of  Banking  Connections 
Additional  Amendments  to  the  Act 
Reserve  Banks'  Discount  Powers  Broadened 
Investments  of  National  Banks 
Amendments  to  Revised   Statutes 
Controlling  Credit  Through  Discount  Rates 

VIII.     Regulations  of  the  Federal  Reserve  Board 50 

Powers  of  New  York  State  Banks 
Desirability  of   Bills  of   Exchange 
Scope  of  Acceptances  Extended 
Regulations   on   Bankers'   Acceptances    — . 
Final   Definition    of   Trade   Acceptance 
Open-Market  Purchase  of   Bankers'  Acceptances 
Preferential  Rate  on  Acceptances 
Checking  Tendency  Toward  Over-Expansion 
Cable  Transfers  and  Bills  of  Exchange 
Character  of  Bills  and  Acceptances  Eligible 
Bills  of  Exchange  and  Trade  Acceptances 
Bankers'  Acceptances- 
Kinds  of   Bills   and  Acceptanc«s   Specified 
Maturity  of  Bankers'  Acceptances  Extended 
Statutory  Provisions  Governing  Rediscounts 
Notes,  Drafts,  and  Bills  of  Exchange  Eligible 
Applications   for  Rediscount 
Promissory  Notes 

Drafts,  Bills  of  Exchange,  and  Trade  Acceptances 
Six  Months'  Agricultural   Paper 
Rediscount   of   Bankers'   Acceptances 
Acceptance  of  Drafts  and   Bills  of   Exchange 
Bills  Drawn  to   Create   "Dollar  Exchange" 
Operations  of  Foreign  Banking  Corporations 

—  5  — 


INDEX— Continued 


IX.     The  United  States  Warehouse  Act 82 

Receipts   for  Agricultural   Products   Stored 
Contents  of  a  Warehouse  Receipt 
Issue  of  Other  than  Original  Receipts 
Conditions   Governing  Delivery  of    Products 
State  Laws  Not  Impaired  by  Act 
Regulations   for  Wool   Warehouses 
Negotiable  and  Non-Negotiable  Receipts 
Duplicating  Receipts  Lost  or  Destroyed 
Regulations   Covering  Delivery  of  Wool 

X.     The  Edge  Export  Finance  Act 90 

Authority   for   Formation  of   Corporations 
How   Corporations   May  be  Organized 
Form  of   Organization   Certificate 
Authority  to  Commence  Business 
Rules  Governing  Transfers  of  Stock 
Stock  Held  Contrary  to  Law 
Investments  in  Other  Corporations 
Issue  of  Debentures  and  Other  Obligations 
Sale  of  Foreign  Securities 
Regulations  Governing  Acceptances 
Deposits  and  Reserve  Required 
General   Limitations  and   Restrictions 
Advantages  of  New  Legislation 
Support  of  Investors  Essential 
Powers  of  Corporations  Varied 

XL    The  Federal  Bill  of  Lading  Act 103 

Two  Kinds  of  Bills  of  Lading  Defined 

To  Whom  Carriers  May  Make  Delivery  of  Goods 

Deliveries  for  Which  the  Carrier  is  Liable 

"Shipper's  Weight,  Load  and  Count" 

Rights  of  Creditors  to  Attach  Bills  of  Lading 

Negotiating  or  Transferring  Bills  of  Lading 

Warrants,  Indorsements,  Rights  and  Remedies 

Acceptance  Forms 

—  6— 


Chapter  1 


CREDIT  FUNCTIONS  AND  INSTRUMENTS 


<<TN  the  primitive  ages  of  commerce,  article  was  exchanged  for 
A  article  without  the  use  of  money  or  credit.  This  was  simple 
barter.  As  civilization  progressed,  a  symbol  of  property — a  com- 
mon measure  of  value — was  introduced  to  facilitate  the  exchanges 
of  property.  This  may  be  iron  or  any  other  article  fixed  by  law  or 
by  consent,  but  it  has  generally  been  gold  or  silver.  This  certainly 
is  a  gfreat  advance  beyond  simple  barter,  but  no  greater  than  has 
been  gained  in  modern  times  by  proceeding  from  the  use  of  money 
to  the  use  of  credit. 

"Commercial  credit  is  the  creation  of  modern  times,  and  be- 
longs, in  its  highest  perfection,  only  to  the  most  enlightened  and 
best-governed  nations. 

"Credit  is  the  vital  air  of  the  system  of  modern  commerce.  It 
has  done  more — a  thousand  times  more — to  enrich  nations  than  all 
the  mines  of  all  the  world.  It  has  excited  labor,  stimulated  manu- 
factures, pushed  commerce  over  every  sea,  and  brought  every 
nation,  every  kingdom  and  every  small  tribe  among  the  races  of 
men  to  be  known  to  all  the  rest.  It  has  raised  armies,  equipped 
navies,  and,  triumphing  over  the  gross  power  of  mere  numbers,  it 
has  established  national  superiority  on  the  foundation  of  intelli- 
gence, wealth  and  well-directed  industry. 

"Credit  is  to  money  what  money  is  to  articles  of  merchandise. 
As  hard  money  represents  property,  so  credit  represents  hard 
money,  and  it  is  capable  of  supplying  the  place  of  money  so  com- 
pletely that  there  are  writers  of  distinction  who  insist  that  no 
hard  money  is  necessary  for  the  interests  of  commerce.  I  am  not  of 
that  opinion.     I  do  not  think  any  government  can  maintain  an 

—  7  — 


exclusive  paper  system  without  running  to  excess,  and  thereby 
causing  depreciation. 

"I  hold  the  immediate  convertibility  of  banknotes  into  specie 
to  be  an  indispensable  security  for  their  retaining  their  value.  But 
consistently  with  this  security,  and  indeed  founded  upon  it,  credit 
becomes  the  great  agent  of  exchange.  It  increases  consumption 
by  anticipating  products,  and  supplies  present  wants  out  of  future 
means.  As  it  circulates  commodities  without  the  actual  use  of 
gold  and  silver,  it  not  only  saves  much  by  doing  away  with  the 
constant  transportation  of  the  precious  metals  from  place  to  place, 
but  also  accomplishes  exchanges  with  a  degree  of  dispatch  and 
punctuality  not  otherwise  to  be  attained. 

"All  bills  of  exchange,  all  notes  running  upon  time,  as  well  as 
the  paper  circulation  of  the  banks,  belong  to  the  system  of  com- 
mercial credit.  They  are  parts  of  one  great  whole.  We  should 
protect  this  system  with  increasing  watchfulness,  taking  care,  on 
the  one  hand,  to  give  it  full  and  fair  play,  and,  on  the  other,  to 
guard  it  against  dangerous  excess." 

This  masterly  summing  up  of  the  functions  of  credit  and  its 
instruments  might  have  been  uttered  but  yesterday,  instead  of 
more  than  four-score  years  ago.  It  is  from  a  speech  by  Daniel 
Webster  in  the  United  States  Senate,  March  18,  1834. 


Acceptance  an  Important  Credit  Instrument 

Credit  is  the  lifeblood  of  business.  One  of  the  principal  chan- 
nels through  which  it  flows  is  the  acceptance,  or  time  bill  of 
exchange. 

The  system  of  credit  based  on  acceptances  has  been  very  wide- 
ly developed  through  long  usage  in  England,  France  and  Germany. 
It  is  so  comparatively  new  in  the  United  States  that  it  is  not  yet 
generally  understood.  Its  fields  of  employment  here,  however,  are 
broadening  rapidly,  and  it  seems  likely  to  become,  before  very  long, 
one  of  our  chief  credit  instruments.  Such  an  opinion  was  expressed 
by  the  Federal  Reserve  Board  in  its  circular  of  February  8,  1915, 
as  follows: 

"The  Acceptance  is  still  in  its  infancy  in  the  field  of  American 
banking.  How  rapid  its  development  will  be  cannot  be  foretold, 
but  the  development  itself  is  certain." 

—  8  — 


Trade  Acceptance  Defined 

The  term  "Trade  Acceptance"  is  defined  by  the  Federal  Re- 
serve Board  in  its  circular  of  July  15,  1915,  as 

"a  bill  of  exchange _...drawn  to  order,  having  a  definite  ma- 
turity and  payable  in  dollars  in  the  United  States,  the  obliga- 
tion to  pay  which  has  been  accepted  by  an  acknowledgment, 
written  or  stamped,  and  signed,  across  the  face  of  the  instru- 
ment, by  the  company,  firm,  corporation  or  person  upon  whom 
it  is  drawn;  such  agreement  to  be  to  the  effect  that  the  ac- 
ceptor will  pay  at  maturity,  according  to  its  tenor,  such  draft 
or  bill  without  qualifying  conditions." 

A  bill  of  exchange  is  defined  by  the  English  Bills  of  Exchange, 
Act  of  1882,  as  "an  unconditional  order  in  writing,  addressed  by 
one  person  to  another,  signed  by  the  person  giving  it,  requiring 
the  person  to  whom  it  is  addressed  to  pay  on  demand,  or  at  a  fixed 
or  determinable  future  time,  a  certain  sum  in  money  to,  or  to  order 
of,  a  specified  person,  or  to  bearer." 

A  negotiable  bill  of  exchange,  or  acceptance,  therefore,  is  a 
written  order  whereby  A  commands  B  to  pay  to  C,  or  to  his  order, 
or  to  bearer,  a  sum  of  money  absolutely  and  at  a  certain  future 
time.  A  is  the  drawer,  B  the  drawee,  and  C  the  Payee.  If  B 
agrees  to  obey  the  order  upon  him,  he  writes  the  word  "Accepted" 
across  the  face  of  the  bill  and  signs  his  name  below  this  word, 
together  with  the  date  of  the  acceptance,  the  date  that  it  is  pay- 
able, and  the  place.  Thereupon  B  becomes  and  is  known  there- 
after as  the  Acceptor,  and  the  document  is  known  as  an  Accepted 
Bill,  or  Acceptance.  Such  instruments  are  two-name  paper,  since 
they  carry  the  names  of  both  the  Drawer  and  the  Acceptor,  If 
the  Payee  chooses  to  transfer  the  paper  and  all  his  rights  under 
it  to  some  other  person,  he  indorses  it. 


Acceptances  Differ  from  Notes  and  Drafts 

An  acceptance,  or  time  bill  of  exchange,  therefore,  is  an  order. 
Its  acceptance  is  equivalent  to  the  promise  to  pay  that  is  contained 
in  a  promissory  note.  The  promissory  note,  however,  is  not  in- 
tended to  transfer  funds,  but  to  settle  debts  and  borrow  money, 

—  9  — 


A  note  is  drawn  by  persons.  An  acceptance  is  drawn  on  persons. 
The  acceptance  consequently  performs  an  entirely  different  func- 
tion than  the  promissory  note.  Each  has  its  distinct  field  in  the 
world's  financial  affairs. 

The  acceptance  differs  also  from  the  commercial  draft.  The 
commercial  draft,  with  bill  of  lading  attached,  may  be  drawn  at 
sight,  or  may  be  made  payable  at  a  certain  time  after  sight.  This 
enables  the  title  to  the  goods  covered  by  the  bill  of  lading  to  re- 
main vested  in  the  seller,  the  drawer  of  the  draft,  or  the  person  to 
whom  the  bill  of  lading  may  be  indorsed,  until  the  draft  is  paid. 
Another  form  of  commercial  draft  is  the  sight  draft  for  collection, 
which  is  drawn  on  buyers  who  have  been  previously  sold  on  open 
account.  It  has  been  generally  used  as  a  means  of  collection  when 
ordinary  means  have  failed  to  produce  payment.  The  trade  ac- 
ceptance, on  the  other  hand,  is  an  acknowledgment  of  an  obligation 
and  a  promise  to  pay  it  on  a  certain  date. 


Fundamental  Purpose  of  Acceptances 

The  time  bill  of  exchange,  or  acceptance,  has  a  fundamental 
purpose  which  neither  the  promissory  note  nor  the  commercial 
draft  possesses.  That  purpose  is  to  facilitate  the  mutual  offsetting 
of  debts  between  individuals,  as  well  as  nations.  Acceptances,  or 
time  bills  of  exchange,  pass  from  hand  to  hand  the  same  as  money. 
They  serve  the  same  purpose  as  the  transfer  of  gold  itself  in  the 
cancellation  of  debts.  Abroad,  they  have  long  been  considered  as 
the  easiest  and  cheapest  form  of  credit  instruments. 

EKTonomists  regard  acceptances  as  a  sort  of  special  currency. 
Such  really  has  been  their  use  for  the  last  two  centuries  in  the  Old 
World,  where  acceptances  have  been  employed  between  business 
houses  in  the  settlement  of  accounts.  They  circulate  among  banks 
which  buy  and  resell  them  according  to  their  needs  until  they  are 
negotiated  to  the  central  or  government  bank  of  the  country.  The 
provisions  of  the  Federal  Reserve  Act,  their  interpretations  by  the 
Federal  Reserve  Board,  the  regulations  issued  by  it,  and  the  differ- 
ent State  laws  enacted  in  recent  years  indicate  a  purpose  to  make 
bank  acceptances  an  asset  quickly  and  easily  convertible  into  cash, 
and  to  constitute  an  additional  reserve  to  the  banks  carrying  them. 

—  10  — 


Chapter  II 


THE  ENGLISH  CREDIT  SYSTEM 


IN  England  and  Germany,  the  bank  acceptance  is  the  principal 
form  of  credit.     In  France,  the  individual  acceptance  is  more 
generally  used. 

London  became  the  center  of  international  payments  in  export 
trade  through  England's  being  the  chief  commercial  carrier  in  the 
early  stages  of  the  development  of  Europe's  export  markets.  Eu- 
ropean traders  were  quick  to  see  the  convenience  and  advantage 
of  receiving  their  payments  in  one  currency,  rather  than  in  the 
miscellaneous  currencies  of  the  different  overseas  markets.  Thus, 
London  not  only  became  a  clearing  house  for  international  set- 
tlements, but  also  a  central  place  of  deposit  for  bankers  and 
merchants  all  over  the  world. 

This  created  an  immense  revenue  for  England.  For  very 
many  years,  London  collected  a  heavy  toll  from  the  financing 
of  practically  all  the  exports  and  imports  between  the  United 
States  and  other  countries.  The  proceeds  of  a  shipment  of  ma- 
chinery or  merchandise,  for  example,  from  St.  Louis,  Chicago  or 
New  York,  destined  to  some  point  in  South  America,  would  be 
in  the  form  of  a  draft  drawn  on  London.  For  the  acceptance  of  this 
draft,  the  London  banker  would  charge  a  round  commission.  A  bale 
of  raw  silk  imported  from  Japan  by  a  house  in  New  York  would  be 
paid  for  by  the  seller  in  Japan  drawing  a  bill  on  London.  It  was 
estimated,  before  the  Federal  Reserve  Act  went  into  operation, 
that  American  exporters  and  importers  were  paying  London  some 
$10,000,000  a  year  for  such  services. 

—  11  — 


"Dollar  Exchange*'  and  Sterling 

The  fundamental  reason  for  this  was  that  the  bank  accept- 
ances in  pounds  sterling  could  always  be  converted  into  the  local 
currency  of  any  country  at  a  close  rate  of  exchange,  whereas  a 
draft  in  dollars  on  New  York  would  have  no  such  markets.  To-day, 
this  condition  is  changing  rapidly,  and  "dollar  exchange,"  in  many 
of  the  world's  marts,  is  being  sought  instead  of  sterling  because  its 
purchasing  power  as  expressed  in  local  currency  is  greater  than 
that  of  sterling  exchange.  This  gives  the  American  exporter  an 
advantage  that  he  has  never  before  enjoyed — that  of  dealing  with 
foreign  buyers  and  sellers  in  his  own  domestic  currency,  thereby 
saving  the  extra  cost  of  exchange  on  London,  and  other  expenses. 


England's  Position  in  International  Banking 

While  other  nations  have  become  important  factors  in  the 
ocean-carrying  trade,  and  thus  are  less  dependent  upon  the  great 
and  long-established  facilities  of  Great  Britain  for  the  transporta- 
tion of  merchandise  across  the  seas,  they  have  been  less  successful 
in  their  attempts  to  deal  directly  with  their  international  customers 
and  to  eliminate  London  as  a  center  of  financial  intercourse  with 
the  export  markets  of  the  world.  Germany,  for  example,  by  the 
organization  of  German  merchants  in  many  foreign  markets,  suc- 
ceeded in  establishing  a  standing  for  German  currency  abroad  and 
a  certain  volume  of  direct  financial  intercourse.  Yet  the  German 
exporters  and  importers  still  relied  largely  on  London  in  their 
overseas  settlements,  as  England  has  developed  the  standard  forms 
of  dealing  with  the  financing  of  shipments  to  and  from  overseas 
markets. 

The  English  banks  engaged  in  international  banking  have 
divided  their  world  territory  on  the  basis  of  commercial  usages  and 
prevailing  business  conditions.  East  and  West  are  sharply  dif- 
ferentiated, and  the  British  dominions  with  a  white  commercial 
population  are  catered  to  by  special  banks.  Within  these  three 
great  divisions,  there  is  a  further  specialization  by  countries.  Al- 
most all  of  these  banks  have  headquarters  in  London. 

—  12  — 


The  London  Money  Market 

The  heart  of  the  London  money  market  is  the  Bank  of  Eng- 
land. Then  there  are  the  great  joint  stock  banks,  with  several  thou- 
sand branches;  the  Colonial  banks;  the  Foreign  banks,  which,  to- 
gether with  the  Colonial  banks,  practically  cover  the  world  with 
their  branches;  finance  houses  that  make  a  specialty  of  accepting 
bills  growing  out  of  imports  and  exports;  stock  brokers;  bill 
brokers ;  the  Stock  Exchange  and  its  affiliations ;  the  insurance  com- 
panies, and  the  private  lenders,  who,  in  the  aggregate,  compose 
the  great  money-holding  interests  of  London  and  what  is  ordinarily 
known  as  the  London  money  market. 

The  Bank  of  England  does  not  buy  bills  payable  abroad.  It 
requires  two  British  names  to  the  bills  it  purchases,  and  one  of 
these  must  be  the  acceptor. 


Theory  of  the  English  System 

The  London  money  market  is  regulated  principally  by  the 
open-market  operations  of  the  bankers  and  brokers.  If  they  con- 
sider that  the  commercial  public  is  over-trading,  they  check  this 
tendency  by  ceasing  to  buy  bills.  The  Bank  of  England,  while  it 
is  not  obliged  to  buy  all  bills  that  are  offered,  is  accustomed  to 
purchase  all  that  comply  with  its  requirements.  The  whole  theory 
of  the  English  system  is  based  on  the  keeping  of  balances  with  the 
Bank  of  England  which  are  immediately  convertible  into  cash,  and 
the  rediscounting  of  paper  with  the  bank  to  obtain  cash. 

The  Bank  of  England  rate  of  discount,  which  is  fixed  at  the 
weekly  meeting  of  the  Board  of  Directors  and  is  published  on 
Thursdays,  moves  up  or  down  primarily  in  accordance  with  the 
law  of  supply  and  demand.  If  the  demands  are  heavy  and  the 
supplies  of  funds  are  low,  the  Bank  increases  its  rate,  which 
discourages  borrowing.  If  the  opposite  condition  prevails,  the  rate 
is  lowered  and  borrowing  is  correspondingly  stimulated. 

—  13  — 


Classes  of  English  Bills 

The  two  classes  of  bills  or  acceptances  most  largely  dealt  in 
by  the  London  market  are  the  "trade  bill"  and  the  "finance  bill." 
The  former  is  the  result  of  one  merchant  selling  goods  to  another. 
The  seller  draws  on  the  buyer;  the  latter  accepts  the  paper  and 
returns  the  bill  to  the  seller,  who  discounts  it  with  his  banker,  or 
in  the  open  market.  The  "finance  bill"  may  represent  exchange 
transactions ;  it  may  be  for  the  purpose  of  carrying  stocks  of  goods 
or  securities,  or  in  the  anticipation  of  public  loans;  or  it  may  be 
merely  for  accommodation.  All  finance  bills,  except  the  last  named, 
when  properly  accepted,  are  eligible  for  rediscount  by  the  Bank 
of  England. 

An  essential  part  of  these  bills  of  exchange  consists  of  bills 
drawn  on  bankers  and  accepted  by  them  on  behalf  of  customers  in 
accordance  with  arrangements  previously  made.  These  "bank 
bills,"  while  usually  drawn  to  liquidate  a  commercial  transaction, 
being  accepted  by  a  bank,  become  of  a  higher  quality  than  mercan- 
tile acceptances,  unless  the  latter  are  of  the  highest  standing. 
These  "bank"  or  "prime"  bills  are  discountable  at  the  lowest  mar- 
ket rates.  As  the  quality  of  the  acceptance  becomes  lower,  the 
rates  for  its  discount  rise  in  proportion  to  the  possible  risk.  Gen- 
erally, in  the  London  market,  the  rate  for  trade  bills  is  one-half  of 
one  per  cent,  higher  than  for  bank  bills.  In  the  English  money 
markets,  close  watch  is  kept  on  the  amount  of  paper  that  is  dis- 
counted by  each  of  many  thousands  of  firms.  A  house  that  ap- 
pears to  be  over-extending  its  credit  is  immediately  made  aware  of 
the  prevaiHng  opinion  by  finding  that  its  bills  are  selling  below 
the  market,  or  by  the  rates  being  raised  for  additional  acceptances 
that  it  seeks  to  discount. 


British  Banks  Governed  by  Traditions 

It  is  this  uniformity  of  security  that  has  made  possible  the 
great  public  discount  markets  in  London  and  the  other  leading 
financial  centers  of  Europe.  The  English  banks  are  legally  re- 
stricted only  in  regard  to  bank  notes — not  as  to  their  banking 
operations.  They  may  open  as  many  branches  as  they  like;  they 
may  make  any  kind  of  advances  they  choose;  the  form  of  their 

—  14  — 


investments  or  reserves  is  not  governed  by  any  Act  of  Parliament. 
In  fact,  the  English  bank  uses  its  reserves  whenever  it  considers 
it  necessary.  But  although  these  British  financial  institutions  seem 
to  be  a  law  unto  themselves,  they  are  actually  governed  by  tradi- 
tions, tmwritten  laws  and  public  opinion.  These  forces  keep 
them  to  a  high  standard  of  excellence  and  banking  conduct. 


Documentary  Bills  or  Drafts 

The  bulk  of  payments  through  London  foreign  banks — those 
engaged  particularly  in  international  trade — is  on  the  basis  of  docu- 
mentary bills  or  drafts.  These  are  drafts  accompanied  by  bills  of 
lading  (full  sets),  invoice  copy  and  insurance  certificates.  There 
are  also  so-called  "clean  bills,"  unaccompanied  by  such  documents. 
The  documentary  drafts  are  drawn  either  against  payment  (d/p) 
or  against  acceptance  (d/a).  In  the  case  of  documents  against 
payment,  it  frequently  happens  that  the  drawee  pays  before  the 
draft  falls  due,  if,  for  instance,  he  has  resold  the  goods  and  needs 
the  documents.  In  this  case,  he  receives  an  interest  allowance, 
generally  one  per  cent,  below  the  central  bank  discount  rate. 
Only  partial  advances  are  made  in  England  to  drawers  on  d/a 
drafts,  and  even  these  are  not  readily  granted.  These  acceptances 
are  more  readily  taken  as  collateral  in  loans  or  current  accounts 
(over-drafts),  or  fully  discounted. 

These  documentary  drafts  are  usually  drawn  at  from  two  to 
six  months.  The  interest  clause  becomes  more  and  more  import- 
ant as  the  distance  and  time  of  transit  of  documents  between  the 
shipping  or  receiving  point  of  the  goods  and  London  increases. 
In  London's  dealings  with  the  Far  East,  for  example,  the  drawee 
has  to  pay,  in  addition  to  the  face  value  of  the  draft,  a  certain 
interest  until  the  approximate  day  of  the  receipt  of  the  return 
funds  in  Europe.  Such  drafts  contain  this  clause:  "With  interest 
at  —  per  cent,  per  annum  added  thereto  from  the  date  hereof  to 
approximate  due  date  of  arrival  of  the  funds  in  London." 

The  major  portion  of  the  business  of  the  English  banks  in 
overseas  settlements  is  to  take  up  documentary  drafts,  either  for 
collection  or  for  payment  and  advances  thereon,  or  for  acceptance 
on  a  commission  basis.    Occasionally,  the  buyer  on  the  other  side 

—  15- 


of  the  world  has  a  credit  with  the  bank  in  London,  from  which  he 
authorizes  the  latter  to  pay  invoices.  This  is  the  very  best  of 
all  methods  of  financing  shipments. 


Safeguards  of  English  Banks 

The  mere  collection  of  drafts  is  only  a  very  small  part  of  the 
activities  of  British  banks.  Most  London  banks  decline  specifi- 
cally to  assume  any  liability  for  losses  in  connection  with  drafts; 
for  documents  that  they  handle;  for  merchandise  that  they  may 
be  called  upon  to  take  over;  for  the  solvency  or  the  remittances 
of  their  agents  or  correspondents,  etc.  While  they  safeguard 
themselves  in  every  way  consistent  with  sound  and  conservative 
banking  principles,  they  undertake  to  use  all  care  and  diligence  in 
the  interest  of  their  clients.  As  a  rule,  the  English  usage  is  that 
the  customer  shall  assume  the  costs  of  collecting  the  drafts  and 
of  forwarding  the  proceeds  to  the  seller.  For  this  reason,  the 
drafts  either  include  these  expenses  in  their  face  value  or  bear 
the  clause  "charges  for  collection  to  be  added,"  or,  on  South  Africa 
and  Australia,  "remitting  exchange  to  be  collected." 


Advances  on  Consignments 

In  addition  to  partial  or  total  advances  on  drafts,  and  even  to 
their  outright  purchase,  English  banks  make  advances  on  con- 
signments. In  such  cases,  the  signature  of  the  drawer  of  the  draft 
forms  one  part  of  the  security,  and  the  goods  the  other.  If  the 
goods  are  to  be  turned  over  on  acceptance  of  the  draft,  the  bank 
retains  a  lien  on  the  goods,  which  remain  practically  mortgaged  to 
the  bank  until  the  draft  is  paid.  The  bank's  rights  are  acknowl- 
edged in  a  "letter  of  hypothecation,"  which  reads,  in  part,  as 
follows : 

"The  above  shipment,  the  goods  and  the  proceeds  thereof  are 
to  be  treated  as  specially  hypothecated  to  you  by  way  of  collateral 
security."  Or,  "the  said  goods  in  the  meantime,  and  their  pro- 
ceeds or  any  part  thereof,  to  be  held  by  in  trust,  on 

your  behalf,  for  the  payment  of  the  said  sum."     The  bank  can 

—  16  — 


instruct  the  consignee  regarding  fire  insurance,  sale,  etc.  The 
recipient  of  the  advance  also  specially  binds  himself  to  guard  the 
bank  against  any  loss  in  connection  with  the  failure  to  sell,  etc. 
The  consignee  signs  a  "letter  of  lien"  or  a  "letter  of  trust,"  which 
says:  "We  hereby  engage  to  receive  and  hold  the  said  goods  in 
trust  in  your  behalf,  to  have  them  duly  stored,  insured  against 
fire,  and  to  remit  to  you  the  proceeds  as  and  when  sold." 


Other  Methods  of  Financing  Shipments 


Still  another  method  of  financing  foreign  shipments,  and  one 
that  is  more  generally  used  by  the  London  banks,  is  to  permit  the 
shipper  to  draw  on  them,  promising  to  accept  the  draft.  In  this 
case,  the  bank  must  be  secured  before  the  maturing  date  of  the 
acceptance.  This  method  is  very  advantageous  to  the  exporter,  be- 
cause an  acceptance  by  a  first-class  English  bank  can  always  be 
turned  into  cash  at  the  lowest  market  rate  at  once,  and  for  its  full 
amount.  The  bank  is  not  out  any  money,  and  provides  for  being 
fully  secured  before  the  date  when  the  acceptance  has  to  be  taken 
up.  Here  the  accepting  bank  acts  as  an  agent  for  the  buyer  and 
takes  control  of  the  goods,  turning  them  over  against  a  letter  of 
trust  or  promissory  note,  or  it  stores  them  at  destination  and 
delivers  them  against  the  buyer's  warrants. 

Another  phase  of  this  transaction,  where  the  bank  authorizes 
the  seller  to  draw  and  promises  to  accept  the  draft,  is  the  con- 
firmed letter  of  credit,  by  which  the  bank  binds  itself  to  accept 
drafts  to  a  certain  stipulated  amount. 


17  — 


Chapter  III 


GERMAN  AND  FRENCH  SYSTEMS  OUTLINED 


THE  English  system  has  been  outlined  in  considerable  detail 
because  the  methods  of  other  countries,  especially  Germany, 
have  been  largely  adapted  from  it.  There  are  not  in  the  English 
system,  however,  the  extensive  ramifications  of  long-term  industrial 
credits  that  are  found  in  the  German  system,  which  is  partly  due 
to  the  peculiarly  intimate  connection  between  banks  and  industrial 
enterprises  that  is  characteristic  of  Germany.  While  the  British 
overseas  banks  and  export  merchants  furnish  adequate  accommo- 
dations to  foreign  customers,  they  have  shown  a  consistent  tend- 
ency to  keep  down  the  length  of  credit  terms,  preferring — other 
things  being  equal — to  let  the  trade  go  rather  than  encourage  a 
policy  which,  from  their  long  experience,  they  believe  to  be  harmful. 
The  long-term  credits  that  the  Germans  were  accustomed  to 
extend  in  Latin-America,  in  the  Far  East  and  in  other  export  mar- 
kets, it  is  important  to  note,  were  not  credits  given  by  manufac- 
turers, but  by  the  export  merchants  with  or  without  the  financial 
assistance  of  certain  banks.  The  German  export  merchant,  as  a 
rule,  purchases  from  the  manufacturer  on  the  basis  of  making 
payment  within  30  days,  the  usual  stipulation  being  that  he  shall 
have  the  goods  in  his  possession  before  settling.  There  has  been 
a  growing  tendency  of  late  years,  however,  to  eliminate  the  export 
merchant  as  an  economic  factor  in  Germany,  and  for  the  manu- 
facturer to  do  business  direct  in  overseas  markets  on  a  cash  or  a 
short-term  credit  basis.  By  eliminating  interest  charges  and  mid- 
dlemen's profits,  this  makes  for  lower  prices. 

—  18  — 


Operations  of  the  Reichsbank 

The  great  Reichsbank,  a  private  institution,  with  private 
means,  yet  under  the  control  of  the  State,  dominates  the  German 
banking  system  and  the  German  money  market.  The  Reichsbank 
dictates  the  discount  rate  and  the  rate  for  loans.  The  great  banks 
of  Germany  are  in  constant  intercourse  v^^ith  it,  and  are  the  Reichs- 
bank's  so-called  "giro"  customers.  "Giro"  is  a  Spanish  word, 
meaning  the  circulation  of  specie  or  bills  of  exchange,  and  as  used 
in  Germany  signifies  that,  in  place  of  making  cash  payments  to  one 
another,  these  banks  can  use  the  Reichsbank  as  a  clearing  house. 

The  principal  business  of  the  Reichsbank  is  the  discount  of 
short-term  bills  of  exchange,  and  particularly  mercantile  bills. 
Credit  and  finance  bills,  as  a  rule,  are  excluded  from  its  transac- 
tions. The  soundness  of  this  practice  is  obvious.  A  bill  is  based 
upon  a  real  money  claim  and  is,  to  a  certain  extent,  a  security  in 
itself.  It  is  secured  by  the  business  capital  already  employed,  and 
when  discounted  it  discharges  the  economic  function  of  liquidating 
that  portion  of  the  producer's  capital  contained  in  the  goods.  It 
releases  the  fixed  capital  in  the  goods  and  makes  it  available  for 
another  operation.  The  Reichsbank  and  the  other  banks  of  Ger- 
many encourage  the  use  of  bills  in  both  internal  and  foreign  trans- 
actions, and  are  themselves  large  acceptors  of  bills.  Thus,  they 
have  become  important  factors  in  the  development  of  the  great 
banking  system  of  the  country. 


Bank  Acceptances  in  Germany 

In  Germany,  the  direct  "trade  acceptance"  has  been  displaced 
by  the  bank  acceptance.  This  is  due  to  the  custom  of  merchants 
drawing  on  their  bankers  instead  of  on  the  purchasers  of  their 
goods,  and  using  the  banker's  acceptance  in  paying  their  creditors. 
Most  of  the  German  bills  are  accepted  on  the  basis  of  their  indi- 
vidual credit  standing,  and  not  against  collateral,  as  is  the  case 
in  England.  The  development  of  this  practice  is  explained,  to  a 
certain  extent,  by  the  large  participation  of  the  great  banks  in  a 
vast  number  of  industrial  enterprises.  German  banks  are  repre- 
sented on  the  boards  of  directors  in  numerous  undertakings  of  the 

—  19  — 


most  varied  character  throughout  Germany,  and  give  them  special 
support  in  their  credit  transactions. 

In  selling  a  bill  of  goods,  the  merchant  or  manufacturer  will 
arrange  with  his  bankers  to  draw  on  the  latter  for  the  amount, 
thus  anticipating  payment  for  the  goods.  When  so  accepted,  the 
bill  is  sold  to  other  bankers,  or  in  the  open  market.  When  thus 
indorsed,  it  becomes  "prime"  paper  and  eligible  for  rediscount  at 
the  Reichsbank. 

All  classes  of  domestic  exchanges  in  Germany  are,  to  a  large 
extent,  adjusted  by  means  of  these  bank  acceptances,  which  consti- 
tute about  80  per  cent,  of  the  bills  held  by  banks.  The  credit  stand- 
ing of  the  drawee  makes  the  acceptance  readily  discountable  in  the 
private  market.  The  judgment  of  the  market  prevents  excesses 
through  inflating  the  acceptance  credit.  When  there  is  too  much 
of  it  outstanding,  the  market  reacts.  The  grantor  of  the  credit, 
therefore,  naturally  is  careful  not  to  do  anything  to  shake  the 
confidence  of  the  market  in  himself. 


Financing  Germany's  Overseas  Trade 

Imports  are  financed  by  the  banks  of  Germany  in  practically 
the  same  way  as  in  England,  and  with  similar  safeguards.  In 
financing  exports,  the  German  merchant,  selling  on  six  months* 
time  and  wanting  immediate  cash,  does  not  draw  on  the  overseas 
buyer,  for  that  is  not  in  the  terms  of  sale  and  the  draft  would  not 
be  accepted.  The  seller  arranges  with  his  banker  to  accept  a  draft 
drawn  on  the  strength  of  the  sale.  This  "banker's  acceptance," 
which  is  usually  drawn  for  three  months,  but  which  may  be  re- 
newed, is  generally  at  the  rate  of  ^  of  1  per  cent,  for  the  three 
months,  to  which  must  be  added  revenue  stamps  and  brokerage. 
The  exact  amount  of  the  acceptance  commission  is  regulated  by 
the  desirability  of  the  acceptance  as  determined  by  the  open  dis- 
count market. 

Bills  of  Exchange  in  France 

The  widespread  use  of  bills  of  exchange  in  France  is  due,  in  a 
large  measure,  to  the  liberal  policy  pursued  by  the  Bank  of  France 
in  relation  to  the  discount  of  such  paper.     Together  with  gold  and 

—  20  — 


silver,  commercial  paper  forms  the  basis  of  the  note  issue.  Com- 
mercial paper  of  a  certain  quality  is  interchangeable  with  bank 
notes. 

The  Bank  of  France  is  a  privately  owned  corporation  and, 
with  its  nearly  600  branches,  covers  all  France.  It  opens  accounts 
with  anyone  known  to  it,  and  discounts  for  anyone  who  has  ob- 
tained that  right.  In  the  Paris  offices,  a  little  more  than  half  the 
paper  discounted  is  for  less  than  100  francs  (normally  about  $20), 
and  the  average  count  is  five  francs.  Bills,  commercial  and  agricul- 
tural warrants  of  fixed  maturity,  which  have  not  more  than  three 
months  to  run  and  bearing  three  signatures,  two  of  which  are  of 
parties  domiciled  in  France  and  known  to  be  solvent,  are  freely 
accepted.  Two-name  bills  are  accepted  only  when  accompanied  by 
satisfactory  collateral.    Warehouse  receipts  are  also  received. 

The  private  banks  lend  largely  on  two-name  paper,  and  by 
adding  their  own  indorsement  make  it  a  three-name  paper  eligible 
for  rediscount  at  the  central  bank.  These  private  banks  also 
discount  each  other's  acceptances.  The  usual  rate  for  accepting 
is  J4  of  1  pci"  cent,  for  three  months;  sometimes  it  is  as  low  as  3/16. 


Acceptances  Replace  Open  Accounts  Abroad 

From  the  foregoing  necessarily  brief  outline  of  the  acceptance 
and  draft  systems  in  vogue  in  the  three  principal  trading  and 
banking  countries  of  Europe,  it  will  be  seen  that  in  these  countries 
the  open  account  is  replaced  by  the  bill  of  exchange,  or  time  draft. 
The  acceptance,  or  time  bill  of  exchange,  is  immediately  convert- 
ible into  cash  and,  together  with  the  check,  forms  the  perfect  med- 
ium of  large  payments,  just  as  the  bank  note  forms  the  perfect 
medium  of  small  transactions.  Quick  redemption,  expansion  and 
contraction  with  the  fluctuating  needs  of  business  make  the  check 
and  the  bill  of  exchange  ideal  credit  instruments,  for  they  are  both 
economical  and  efficient. 

An  acceptance,  or  time  bill  of  exchange,  is  superior  to  a 
promissory  note  in  having  behind  it  the  responsibility  of  the 
maker,  the  responsibility  of  the  acceptor  and  a  specific  shipment 
of  goods,  which  presumably  are  to  be  resold  during  the  life  of 
the  instrument  and  thereby  provide  means  of  payment.     Abroad, 

—  21  — 


these  drafts  and  acceptances  circulate  from  hand  to  hand  exactly 
as  checks  do  in  this  country.  There  is  an  obvious  necessity  for 
meeting  them  when  they  fall  due,  because  otherwise  the  acceptor 
would  soon  lose  his  credit  standing  and  have  to  go  out  of  business. 
Furthermore,  they  provide  a  complete  separation  between  com- 
mercial credits  and  investment  credits,  which  have  been  so  con- 
fused under  the  American  method  that  the  distinction  is  often 
lost  sight  of. 


-22 


Chapter  IV 
THE  AMERICAN  CREDIT  SYSTEM 

THE  history  of  bills  of  exchange  in  the  United  States  runs  back 
to  Colonial  times.  They  were  then  used  for  many  purposes, 
but  were  mostly  devices  of  the  State  to  be  employed  in  lieu  of 
metallic  money.  They  were  not  true  ^'trade  bills,"  for  a  com- 
paratively small  proportion  of  them  arose  from  commercial  trans- 
actions. 

After  the  birth  of  the  United  States,  and  up  to  the  Civil  War 
period,  there  was  a  steady  increase  in  the  proportion  of  this  coun- 
try's business  done  through  the  medium  of  bills  drawn  by  the  seller 
of  the  goods  on  the  buyer.  These  "acceptances,"  as  they  were 
called,  stood  high  and  played  a  prominent  part  in  the  commercial 
affairs  of  the  country.  Generally  speaking,  in  proportion  to  the 
volume  of  business  done,  acceptances  were  then  as  largely  em- 
ployed as  they  were  in  England  during  that  period. 

The  Civil  War,  however,  brought  an  aftermath  of  the  whole- 
sale demoralization  of  credit  throughout  the  United  States.  Out 
of  this  grew  the  peculiarly  American  system  of  cash  discounts. 

Cash  Settlement  of  Bills 

For  a  number  of  years  after  the  close  of  the  Civil  War,  credits 
were  uncertain,  interest  rates  were  high  and  the  cash  settlement 
of  bills  was,  therefore,  unusually  desirable.  The  cash  discount  be- 
came the  customary  inducement  for  the  settlement  of  bills,  and 
varied,  as  it  does  now,  but  within  wider  limits,  according  to 
whether  payment  was  spot  cash  or  in  ten  or  thirty  days'  time. 
Because  of  the  high  interest  rates,  these  cash  discounts  had  to  be 
sufficiently  large  to  spur  the  buyer  to  borrow  funds  and  use  them 

—  23  — 


for  the  prompt  settlement  of  his  commercial  debts.  This  method 
relieved  the  seller  of  all  responsibility  for  carrying  the  account, 
and  consequently  was  of  distinct  advantage  to  him.  On  the  other 
hand,  if  a  buyer  was  not  able  to  avail  himself  of  the  cash  discount, 
it  became  a  fair  assumption  that  he  was  not  in  sufficiently  good 
standing  with  his  bank  to  be  in  a  position  to  borrow  the  money 
that  he  needed  for  that  purpose,  and  this  fact  cast  a  certain  dis- 
credit upon  him.  Subsequently,  as  interest  rates  became  less, 
cash  discounts  became  smaller,  until,  as  at  present  in  many  lines 
of  trade,  the  rate  of  these  cash  discounts  and  the  bank  discount 
rate  approach  a  parity. 

Some  Drawbacks  of  Cash  Discounts 

Out  of  this  system  of  cash  discounts,  however,  another  evil 
grew,  and  one  that  still  prevails.  Debtors  frequently  exceed  the 
discount  period  as  stated  on  the  invoice,  and  when  paying  their 
bills  deduct  the  discount  anyway.  Sellers,  owing  to  close  com- 
petition, are  often  inclined  to  permit  this  practice,  thus  allowing 
the  buyers  to  gain  an  unfair  advantage,  not  only  over  their  com- 
petitors, but  also  over  the  sellers  themselves.  The  seller,  there- 
fore, is  compelled — or  at  least  is  tempted — to  figure  his  prices  high 
enough  to  stand  this  improper  deduction.  This,  of  course,  works 
to  the  disadvantage  of  the  buyer  who  scrupulously  observes  the 
invoice  terms  of  30  days  net,  2  off  10;  or  90  days  net,  4  off  30  and 
6  ofif  10,  or  whatever  they  may  be. 

Still  another  drawback  of  the  cash  discount  system,  as  a  whole, 
is  that  being  temporarily  unable  to  discount  his  bills  is  an  onerous 
tax  on  the  purchaser  of  limited  means  who  is  thoroughly  reliable. 
In  his  case,  as  in  the  case  of  others,  it  is  often  difficult  and  incon- 
venient to  make  a  separate  loan  to  cover  each  bill  or  group  of 
bills  when  they  come  in.  One  way  of  looking  at  the  cash  dis- 
count is  in  the  light  of  a  fine  for  letting  an  account  go  to  maturity. 
The  debtor  who  does  not  pay  his  account  when  it  is  due,  but  lets 
it  go  as  long  as  he  can  without  being  sued,  actually  pays  no  more 
for  his  60  or  90  or  120  days'  credit  than  the  one  who  settles  the 
account  on  its  due  date,  10,  15  or  30  days  after  the  date  of  invoice. 

The  open  account  system,  on  which  the  cash  discount  practice 
rests,  is  relatively  little  used  in  Europe.    It  is  there  regarded  as  a 

—  24- 


method  by  which  the  slow-paying  buyer  can  use  the  seller  as  his 
involuntary  banker  without  paying  for  the  accommodation  and 
risk. 

Claims  Arising  in  Settlement  of  Bills 

Still  another  objection  to  the  open  account  system  is  that 
claims  are  made  at  the  time  of  settlement  of  bills— a  constant 
source  of  annoyance.  A  merchant's  invoice  sold  on  open  account 
generally  states  the  terms  of  sale,  or  the  date  when  that  invoice  is 
due  and  payable.  Notwithstanding  this,  open  accounts  are  prac- 
tically payable  at  the  will  of  the  debtor.  If  they  are  not  paid 
on  request,  the  seller  must  sue,  and  must  legally  swear  to  the  just- 
ness of  his  account  and  dispute  any  contention  to  the  contrary. 
He  must  be  able  to  prove  his  account,  but  before  he  can  do  so  he 
runs  the  risk  of  counterclaims,  setoffs  and  other  troubles  that  must 
be  contested  successfully. 

There  is  nothing  to  indicate  the  obligations  between  the  buyer 
and  seller  except  open  accounts  on  the  books  of  each.  If  the 
seller,  in  anticipation  of  the  settlement  of  some  of  his  book  accounts, 
wishes  accommodation  at  his  bank,  he  must  borrow  upon  his  note. 
If  he  uses  his  credit  instead  of  collateral,  he  furnishes  the  bank 
with  a  statement  of  his  assets  and  liabilities.  That  is  all  the  pro- 
tection a  bank  has  in  such  a  case.  It  is  but  natural,  however,  that 
a  bank  having  the  accounts  of  various  business  houses  should  feel 
obliged  to  extend  them  certain  lines  of  credit  in  accordance  with 
their  responsibility  and  borrowing  requirements. 


Use  of  Single-Name  Paper 

In  recent  years,  it  has  become  customary  for  merchants  pre- 
senting good  statements  of  their  condition  to  sell  their  promissory 
notes  to  the  public  through  brokers  in  commercial  paper.  These 
notes  are  offered  to  the  banks  and  are  largely  purchased,  ulti- 
mately, by  investors  who  wish  to  find  employment  for  their  sur- 
plus funds.  A  considerable  proportion  of  these  notes  is  single- 
name  paper,  which  is  sold  solely  upon  the  credit  standing  of  the 
maker.  The  only  responsibility  assumed  by  the  broker  is  for  the 
genuineness  of  the  signature.     When  money  is    easy,    there    is    a 

—  25  — 


wide  market  for  this  class  of  commercial  paper,  but  its  buyers 
must  depend  entirely  on  such  credit  information  as  they  can  obtain 
regarding  its  intrinsic  value.  These  instruments  of  credit — plain 
notes  of  hand — are  therefore  bought  and  sold  on  faith  alone.  Gen- 
erally, their  makers  furnish  financial  statements  only  once  a  year 
and,  naturally,  at  the  period  when  their  business  is  in  the  most 
favorable  financial  condition.  It  is,  of  course,  very  difficult  to 
ascertain  exactly  the  volume  of  paper  a  certain  maker  may  have 
outstanding  at  a  given  time,  and  there  is  no  indication  as  to  the 
occasion  of  its  origin. 


Single-Name  Paper  Replaces  Merchandise  Notes 

The  use  of  single-name  paper  dates  from  the  Civil  War  period. 
Prior  to  that  time,  merchandise  notes  were  largely  used,  running 
for  six  months,  and  even  longer.  The  financial  derangements  that 
followed  the  Civil  War,  however,  increased  the  uncertainty  of 
value  of  these  long-term  credit  instruments.  The  period  of  credit 
was  shortened  and  concessions  were  made  for  quick  settlements. 

At  this  writing,  single-name  paper  predominates  in  the  Ameri- 
can market.  There  are  several  firms  that  are  said  to  handle  more 
than  a  hundred  millions  annually. 

While  the  market  for  single-name  paper  has  been  great  in 
volume,  it  has  been  restricted  in  no  small  degree,  so  that  a  consid- 
erable proportion  of  it  is  comprised  of  notes  made  by  firms  of 
large  capital  and  easily  ascertainable  credit  standing.  Some 
brokers,  in  fact,  will  not  handle  paper  of  concerns  having  less 
than  $500,000  assets.  This  form  of  borrowing,  however,  has 
spread  to  smaller  and  weaker  concerns. 


—  26  — 


Chapter  V 

THE  ADVANTAGES  OF  ACCEPTANCES 

THE  relative  advantages  and  disadvantages  of  the  acceptance 
form  and  the  practice  of  borrowing  in  the  open  market  on 
single-name  paper  have  been  the  subject  of  much  controversy.  It  is 
pointed  out,  for  instance,  that  it  is  much  simpler  for  a  merchant 
to  sell  ten  notes  of  $5,000  each  and  pay  two  or  three  hundred  bills 
with  the  proceeds — availing  himself  of  the  cash  discount — than  it 
would  be  for  him  to  put  several  hundred  trade  acceptances  into 
circulation.  Obviously,  the  cost  of  bookkeeping  and  collection 
would  be  less  in  the  case  of  the  few  notes  than  for  the  many 
acceptances.  Of  course,  the  seller  of  the  notes  has  to  draw  as 
many  checks  as  he  has  bills  to  pay,  but  the  checks  are  quickly 
redeemed  and  pass  out  of  existence.  The  checks  do  not  involve 
as  much  bookkeeping  as  a  similar  number  of  acceptances. 

Question  of  Clerical  Work 

This  question  of  clerical  work  concerns  the  banks  also.  The 
average  man  does  not  realize  the  amount  of  detail  involved  in 
the  handling  of  discounts  by  a  bank.  There  is  a  manufacturer, 
for  instance,  who  takes  notes  in  payment  of  his  output  and  dis- 
counts them  at  several  banks.  Owing  to  the  large  volume  of 
paper  that  the  banks  have  to  handle,  he  is  paying  ^  of  1  per  cent, 
of  the  face  value  of  the  notes  to  cover  clerical  hire.  This  just 
about  covers  the  cost  to  the  banks. 

If  a  business  house  of  large  size  should  make  a  practice  of 
taking  an  acceptance  for  every  invoice,  or  should  turn  all  its  open 
accounts  into  acceptances  once  or  twice  a  month,  it  would  natu- 
rally follow  that  it  would  give  to  its  bank  a  thousand  different 
pieces  of  paper,  instead  of  one  or  two.  Under  the  circumstances, 
the  bank  would  obviously  be  justified  in  making  an  equitable 
charge  for  the  extra  amount  it  would  have  to  spend  for  clerical 

—  27  — 


labor  in  order  to  handle  the  flood  of  acceptances.  On  the  other 
hand,  the  merchant  would  gain  an  advantage  by  using  the  accept- 
ance instead  of  the  open  account  system  with  his  customers,  and 
this  advantage  would  more  than  offset  the  trifling  additional  ex- 
pense of  the  bookkeeping  in  the  bank  and  in  his  own  office. 

In  Europe,  acceptances  are  used  much  more  freely  than  checks, 
and  this  detail  of  bookkeeping  expense  has  adjusted  itself.  In  this 
country,  where  the  check  is  employed  more  freely  than  anywhere 
else  in  the  world,  no  doubt  the  growth  of  the  acceptance  system 
will  eventually  decrease  the  volume  of  checks,  and  thus,  through 
the  working  out  of  the  old  laws  of  compensation,  the  clerical  ques- 
tion will  reach  an  equilibrium. 

Matter  of  Collection  Charges 

An  additional  expense  in  connection  with  the  acceptance  busi- 
ness, but  one  which  also  applies  in  the  use  of  checks,  is  that  in- 
volved by  collection  charges  on  out-of-town  items. 

Under  clearing  house  regulations,  charges  are  made  on  various 
points  for  collecting  both  bankers'  and  trade  acceptances,  as  well 
as  checks  or  drafts.  These  charges  range,  in  the  case  of  the  New 
York  Clearing  House,  from  1/40  to  1/10  of  1  per  cent,  on  bankers* 
acceptances,  while  a  flat  charge  of  1/10  of  1  per  cent,  is  made  on 
trade  acceptances,  notes,  etc.  The  collection  charges  on  bankers' 
acceptances  are,  therefore,  less  than  those  on  trade  acceptances, 
and  they  also  average  lower  than  those  on  checks  or  drafts. 

In  many  instances,  it  is  important  to  note,  no  charge  at  all  is 
made,  particularly  on  bankers'  acceptances.  With  the  broader  de- 
velopment and  application  of  the  facilities  of  the  Federal  Reserve 
System,  moreover,  the  number  of  par  points  is  steadily  increasing, 
and  it  seems  probable  that  the  entire  country  will,  in  time,  be  placed 
upon  a  par  basis. 

Credit  Facilities  Increased  by  Acceptances 

One  of  the  objections  to  domestic  accceptances  is  based  on  the 
ground  that  their  negotiation  by  the  banks  in  the  open  market  of 
discount  would  deprive  commercial  houses  of  selling,  as  heretofore, 
their  own  single-name  notes.  It  has  been  a  common  banking 
experience,  however,  that  the  open  market  of  discount  for  bank 

—  28  — 


acceptances  is  entirely  separate  from,  and  does  not  interfere  with, 
the  discount  of  single-name  commercial  paper,  which  will  con- 
tinue to  be  handled  on  the  same  basis  as  before  bank  acceptances 
came  into  existence.  Banks  having  surplus  funds  to  invest  will 
always  be  attracted  by  the  commercial  paper  of  a  responsible 
house.  Instead  of  curtailing  their  facilities,  bank  acceptances  may, 
on  the  contrary,  enlarge  the  financial  accommodations  put  at  the 
disposal  of  reliable  firms  and  corporations.  For  example,  a  bank 
or  discount  house  may  purchase  the  single-name  notes  of  a  cer- 
tain concern  up  to  $50,000;  this  transaction  will  not  prevent  the 
same  bank  from  purchasing  even  a  larger  amount  of  bills  drawn 
by  the  same  firm  and  accepted  by  responsible  banks,  the  liability 
and  credit  of  which  will  mostly  be  taken  into  consideration  in  this 
second  transaction. 

The  tendency  of  trade  acceptances,  therefore,  is  toward  in- 
creasing a  merchant's  banking  facilities.  As  it  is  now,  the 
merchant  makes  an  arrangement  with  his  bank  for  a  certain  line 
of  credit.  As  a  rule,  the  basis  of  this  is  his  statement,  which  in- 
cludes accounts  receivable  of  whose  nature  the  banker  knows 
nothing,  unless  the  merchant  has  gone  so  far — which  is  unusual — 
as  to  have  his  business  thoroughly  examined  and  audited  by  a 
certified  public  accountant  who  reports  not  only  on  the  arithmetic 
of  the  business,  but  also  as  to  the  character  and  soundness  of  all 
its  resources.  On  the  other  hand,  acceptances  indicate  the  class 
of  trade  a  merchant  is  dealing  with.  In  other  words,  it  enables 
the  bank  to  check  up  the  acceptor.  The  banker  is  primarily  a 
dealer  in  credit,  and  it  is  to  him  the  public  looks  to  keep  the 
credit  machine  in  good  order.  The  acceptance  system  helps  the 
banker  to  keep  sound  the  credit  structure  over  which  he  presides. 


Cash  Discounts  and  Acceptances 

Trade  acceptances  need  not  interfere  with  cash  discounts.  If 
an  invoice  were  paid  in  ten  days,  with  a  deduction  of  the  cash  dis- 
count, the  acceptance  could  be  returned  unsigned,  accompanied  by 
the  check  in  settlement  of  the  bill  that  the  acceptance  covered. 
Or,  if  it  should  be  found  desirable  to  anticipate  maturities  after 
acceptances  had  been  signed,  the  bank,  if  it  desired  to  aid  in 
creating  acceptances,  would  be  willing  to  rebate  the  interest  for 

—  29^ 


the  unexpired  time.  This  is  a  common  practice  with  foreign  ac- 
ceptances where  documents  are  attached  and  only  deliverable  on 
payment  of  the  draft.  Such  drafts  are  drawn  at  60  or  90  days' 
sight,  with  the  understanding  that  if  the  acceptor  desires  to  take 
up  the  draft  and  papers  prior  to  maturity,  the  interest  will  be 
rebated  proportionately. 

Acceptances  Not  Detrimental  to  Credit  System 

Another  objection  that  has  been  urged  against  acceptances  is 
that  they  would  prove  a  detriment  to  the  credit  system. 

For  the  sake  of  argument,  contend  those  who  regard  accept- 
ances as  undesirable  from  that  point  of  view,  take  the  case  of  a 
small  manufacturer — in  the  cloak  and  suit  business,  for  example. 
His  business  represents  a  $10,000  investment.  His  assets  consist 
of  outstanding  accounts,  $5,000;  merchandise,  $2,800;  cash,  $1,000, 
and  fixtures,  $1,200.  He  owes  $4,000  to  merchandise  creditors. 
He  is  doing  a  business  of  $50,000  a  year,  and  makes  a  fair  profit. 
The  trade  acceptance  idea  strikes  him  favorably,  and  he  takes  ac- 
ceptances for  the  goods  he  sells,  receiving  them  on  the  delivery 
of  the  merchandise.  He  suddenly  awakens  to  the  fact  that  he  has 
$5,000  worth  of  negotiable  paper  on  hand,  instead  of  that  much 
in  open  accounts  outstanding.  He  borrows  money  from  the  bank 
on  these  acceptances.  He  begins  to  see  possibilities  of  doubling 
or  even  trebling  his  profits  if  he  can  get  enough  cash  to  operate 
with.  He  has  no  excess  orders  on  hand,  nor  are  there  any  in 
sight  to  warrant  his  expansion.  He  takes  the  $5,000  he  has  re- 
ceived for  his  acceptances  and  buys  more  merchandise,  increasing 
his  liabilities.  He  moves  into  larger  quarters  and  adds  to  his  over- 
head expense. 

Result  of  Unwarranted  Expansion 

Meanwhile,  the  orders  have  not  been  coming  in  as  fast  as  he 
expected  or  hoped,  and  he  realizes  that  he  is  overstocked.  He 
becomes  alarmed  and  begins  sacrificing  his  merchandise,  with  the 
result  that  he  soon  finds  himself  a  heavy  loser.  His  notes  are 
falling  due  and  he  cannot  meet  them.  A  meeting  of  his  creditors 
is  called.  The  bank  is  not  particularly  interested,  for  it  is  well 
secured  and  is  not  likely  to  lose  anything.     Other  creditors  settle 

—  30  — 


for  about  30  cents  on  the  dollar.  If  the  manufacturer  had  not  been 
able  to  hypothecate  his  outstanding  accounts,  claim  those  who  argue 
along  this  line,  he  would  not  have  failed. 

That  such  an  argument  is  fundamentally  wrong,  and  that  it  is 
the  man  and  not  the  system  that  is  to  blame,  will  be  obvious  to 
anyone  who  considers  this  hypothetical  case.  The  manufacturer, 
of  course,  should  have  used  the  $5,000  he  realized  from  his  accept- 
ances to  pay  his  $4,000  outstanding  debts,  thus  strengthening  his 
credit  standing.  With  the  $1,000  balance  he  could  have  safely 
bought  more  merchandise  without  overstocking.  It  was  the 
course  that  he  followed — not  the  manner  in  which  he  obtained 
the  money — that  led  to  his  financial  downfall. 

One  of  the  duties  of  every  merchant  or  credit  man  is  to  guard 
against  things  of  this  sort — to  prevent  unwarranted  expansion  bj' 
refusing  to  sell  larger  quantities  of  merchandise  unless  the  pro- 
spective buyer  can  produce  definite  evidence  that  enlargement  is 
justified. 

Trade  Acceptance  Aid  to  Sound  Banking 

In  the  discount  markets  of  Europe,  the  volume  of  acceptances 
put  forth  by  every  individual,  firm  or  corporation  is  closely 
watched,  and  every  attempt  at  over-expansion  is  checked  by  the 
market  itself.  A  man  whose  bills  are  regarded  as  having  reached 
the  safe  maximum  indicated  by  the  size  and  character  of  his  busi- 
ness soon  finds  that  if  he  tries  to  exceed  his  limit,  as  set  by  the 
general  judgment  of  others,  there  are  fewer  and  fewer  buyers 
for  his  acceptances.  In  fact,  the  volume  of  credit  and  its  intrinsic 
worth  is  regulated  by  the  banker,  who,  as  a  governor  of  credit, 
can  control  both  the  quantity  and  the  quality. 

The  particular  function  of  banking  in  connection  with  accept- 
ances and  other  kinds  of  commercial  paper  is  to  collect  the  various 
obligations  and  "clear"  the  transactions  as  the  clearing  house  clears 
checks.  Debtors  and  creditors  are  constantly  trying  to  get  to- 
gether and  write  olT  their  obligations  against  each  other.  The  trade 
acceptance,  as  it  affords  the  banker  a  check  on  both  the  buyer  and 
the  seller,  is  a  far  greater  aid  to  sound  banking  than  the  promissory 
note.  With  this  new  credit  instrument,  the  American  banker  will 
be  able  to  safeguard,  as  never  before,  the  interests  of  his  clients, 
as  well  as  his  own. 

—  31  — 


Chapter  VI 
DEVELOPING  THE  MARKET  FOR  ACCEPTANCES 


THE  market  for  acceptances  in  this  country  is  still  in  its  in- 
fancy, but  the  indications  are  that  its  development  will  be 
steady,  and  along  the  lines  of  the  great  discount  centers  of  Europe. 
In  London,  Paris  and  Berlin,  th^  eyes  of  the  financial  community 
are  always  closely  fixed  on  the  discount  rate.  In  New  York,  up  to 
the  time  acceptances  began  to  be  traded  in,  the  governing  rate 
was  for  day-to-day  loans  on  the  Stock  Exchange.  The  disadvan- 
tage of  this,  as  compared  with  the  European  system  and  with  the 
Federal  Reserve  System,  is  that  the  latter  bear  a  very  decided 
relation  to  trade  conditions.  The  fluctuations  of  the  market  for 
acceptances  and  bills  of  exchange  generally  depend  primarily  on 
the  demand  for  and  the  supply  of  bills  which  owe  their  origin  to 
trade  transactions,  as  balanced  against  the  demand  for  and  the  sup- 
ply of  money.  If  trade  is  active,  the  supply  of  bills  becomes  large 
and  the  absorption  of  loanable  funds  of  the  banks  is  rapid.  As  these 
surplus  funds  become  less  and  less,  the  discount  rate  advances.  If 
trade  is  slack,  acceptances  become  fewer,  the  competition  for  them 
in  the  discount  market  is  more  keen  and  the  rate  of  discount  de- 
clines. Low  rates  are  an  incentive  to  business,  and  advancing 
rates  act  as  a  natural  check.  The  New  York  call  loan  rate,  on  the 
other  hand,  bears  only  an  indirect  relation  to  trade  conditions,  as 
it  registers  mainly  the  speculative  and  investment  demand  for 
stocks. 

Report  of  New  York  Federal  Reserve  Bank 

The  first  annual  report  of  the  Federal  Reserve  Bank  of  New 
York,  covering  a  period  of  about  fifteen  months,  or  from  October 

—  32  — 


5,  1914,  to  the  close  of  business  on  December  31,  1915,  discusses 
from  the  viewpoint  of  experience  the  working  out  of  the  Federal 
Reserve  Act  as  regards  acceptances.     It  says : 

"The  influence  of  this  bank  on  interest  rates  and  the  ex- 
pansion and  contraction  of  credits  is  likely  to  be  exercised 
more  through  its  open-market  operations  than  through  the  re- 
discounts of  the  member  banks,  or  of  other  Federal  reserve 
banks  ...  It  should  be  the  policy  of  reserve  banks  to 
maintain  a  fairly  stable  rate  on  such  paper  (bankers'  accept- 
ances and  other  bills  purchased  in  the  open  market).  Then  in 
times  of  expansion  or  demand  for  credit,  when  market  rates 
rise  above  theirs,  such  paper  will  flow  into  them  in  substantial 
volume  and  the  gold  released  in  payment  will  find  its  way  into 
the  reserves  of  member  and  other  banks,  increasing  their  credit 
power  and  checking  extreme  advances  in  rates.  In  times  of 
contraction  or  abundant  credit,  when  market  rates  fall  below 
those  of  the  reserve  banks,  the  investments  of  the  latter  will 
be  absorbed  as  they  mature,  by  banks  and  other  institutions, 
thereby  transferring  gold  from  their  reserves  to  the  reserve 
banks,  reducing  the  credit  power  of  the  member  banks  and 
checking   extreme   declines   in   rates. 

"Similarly,  if  a  sufficient  volume  of  bankers'  acceptances 
based  on  imports  and  exports  is  developed  to  create  a  stable 
discount  market  in  New  York  or  elsewhere  in  the  United 
States,  an  international  ebb  and  flow  may  be  effected.  When 
the  dollar  acceptance  reaches  a  degree  of  currency  comparable 
with  that  of  the  sterling  acceptance,  its  use  will  depend  largely 
upon  whether,  on  arrival  in  New  York,  it  can  be  discounted  at 
a  rate  lower  than  the  rate  for  sterling  acceptances  in  London. 
Those  engaged  in  international  business  will  draw  on  the  city 
where  their  drafts  can  be  discounted  at  the  lowest  rate. 

"Through  the  creation  of  the  banker's  acceptance,  an  in- 
ternational credit  instrument  has  been  introduced  into  our  bank- 
ing system  which,  when  developed,  is  likely  to  prove  a  potent 
influence  in  regulating  the  flow  of  credit  between  Europe  and 
America.  It  should  enable  America,  in  normal  times,  to  regulate 
its  credit  position  primarily  by  recourse  to  the  European  market, 
thereby  rendering  domestic  rate  fluctuations  less  violent.  Greater 
stabilization  of  interest  rates  is  one  of  the  most  valuable  con- 
tributions the  system  is  capable  of  making  to  the  orderly  prog- 
ress of  business. 

"The  reserve  bank  and  the  market  rate  for  the  discount  of 
such  bills  in  New  York  has  been  for  nearly  a  year  and  is  now 
lower  than  the  rate  for  similar  bills  in  London.  The  relatively 
small   volume   of    such   credits   which   American   banks   have   sue- 

—  33  — 


ceeded  in  making  operative  even  under  the  unusually  favorable 
opportunity  which  the  war  presents  for  their  extension  is  evi- 
dence of  the  difficulty  which  will  be  encountered  in  developing 
the  acceptance  business  in  the  United  States.  Some  of  the 
fundamental    difficulties    are: 

"(1)  The  disinclination  to  break  old  banking  connections. 

"(2)  The  difficulty  of  educating  handlers  of  bills  in  distant 
places  as  to  American  credits. 

"(3)  The  lack  of  bill  buyers  in  foreign  countries  who  will 
quote  as  low  rates  on  dollar  as  on  sterling  bills. 

"(4)  The  natural  prejudice  of  bill  buyers  in  foreign  coun- 
tries in  favor  of  a  bill  of  known  currency  and  against  a  bill  of 
as  yet  unknown  currency. 

"(5)  The  lack  of  men  trained  to  exercise  the  judgment  and 
financial  responsibility  required  of  them  as  managers  of  branches 
or  agencies  which  American  banks  might  establish  in  foreign 
countries. 

"(6)  The  inferior  communications  for  both  goods  and  mails 
between  the  United  States  and  foreign  countries  as  compared  with 
those  between  Great  Britain  and  foreign  countries. 

"Only  time,  experience,  and  patient  effort  will  remove  these 
handicaps  to  the  elevation  of  dollar  exchange  to  its  proper  posi- 
tion in  international  finance.  The  business,  however,  is  developing 
and  will  continue  to  grow  as  our  banking  machinery  and  connec- 
tions extend  throughout  the  world. 

"The  Act  permits  member  banks  to  accept  an  amount  of  bills 
not  exceeding  50  per  cent,  of  their  capital  and  surplus.  By  the 
amendment  of  March  3,  1915,  under  certain  conditions  they  may 
be  authorized  by  the  Federal  Reserve  Board  to  accept  up  to  100 
per  cent,  of  the  capital  and  surplus. 

"As  this  bank  has  probably  been  the  largest  single  purchaser 
of  bankers'  acceptances,  it  has  been  able,  as  it  gained  experience, 
to  exert  some  influence  toward  standardizing  practice  and  form. 
The  acceptance  of  drafts  in  one  city  payable  in  another  city  has 
been  discouraged;  insistence  that  bills  shall  be  so  indorsed  as  to 
leave  open  no  question  of  title  will,  when  universally  adopted,  add 
greatly  to  the  ready  negotiability  of  bills;  and  discussion  of  the 
terms  of  the  regulation  with  acceptors  and  bill  brokers  has  led  to 
a  better  understanding  of  the  scope  of  the  field  it  covers. 

"The  amended  regulation  issued  September  7,  1915,  consid- 
erably broadened  the  field  of  acceptances  eligible  for  purchase 
and  encouraged  an  increased  volume  of  these  instruments.  The 
further  amended  regulation  issued  December  4,  1915,  covering  the 
purchase  of  bankers'  acceptances  arising  out  of  domestic  trans- 
actions relates  to  a  class  of  bills  which  national  banks  are  not 
authorized  to  accept.  When  accepted  by  institutions  of  high  credit, 
they  have  a  ready  market,  though  at  a  fractionally  higher  rate  than 
acceptances  based  on   foreign  transactions." 

—  34  — 


The  American  Exchange  National  Bank  was  one  of  the  first 
members  of  the  Federal  Reserve  System  to  apply  for  and  receive 
authority  to  accept  bills  up  to  100  per  cent,  of  its  capital  and  sur- 
plus of  $8,000,000,  which  has  since  been  increased  to  $10,000,000. 

Acceptances  Benefit  Both  Buyer  and  Seller 

The  trade  acceptance  is  advantageous  alike  to  the  seller  and 
to  the  buyer  of  goods.  It  brings  about  a  closer  relationship  be- 
tween them  and  inspires  the  greater  mutual  confidence  which  is 
the  basis  of  all  commerce  and  credit.  It  enables  the  seller  to 
dispose  of  his  goods  to  better  advantage,  because  it  affords  him 
increased  and  improved  facilities  for  financing  his  business  through 
the  possession  of  available  and  liquid  credit.  Each  buyer  is  him- 
self a  seller;  each  seller  is  himself  a  buyer.  Therefore,  the  trade 
acceptance  benefits  both  in  an  equal  degree.  It  gives  neither  an 
actual  advantage  over  the  other. 

The  trade  acceptance  give  both  buyer  and  seller  a  better  and 
stronger  sense  of  responsibility  regarding  their  obligations,  not 
only  to  each  other,  but  also  to  the  banks  that  aid  them  in  their 
business.  The  trade  acceptance  does  not  decrease  buying  power; 
it  is  a  safeguard  against  over-buying. 

General  Use  of  Acceptances  Urged 

The  trade  acceptance  enables  business  to  be  transacted  at  a 
smaller  operating  cost.  It  reduces  the  amount  of  losses  through 
bad  debts.  It  affords  adequate  relief  from  the  tendency  to  take 
so-called  cash  discounts  after  their  legitimate  term  has  expired. 

Employed  properly  and  consistently,  the  trade  acceptance  will 
give  every  merchant  or  manufacturer  a  bigger  and  better  place 
in  the  business  world. 

The  trade  acceptance  should  come  into  common  use  in  the 
United  States.  It  is  not  an  experiment.  It  has  been  employed 
for  generations  in  other  countries,  and  has  taken  a  vital  part  in  the 
development  and  expansion  of  their  commercial  and  financial  life. 
Not  until  the  trade  acceptance  is  generally  understood,  and  is  as 
universally  used  here  as  it  is  abroad,  are  we  to  reap  the  full  benefits 
of  the  Federal  Reserve  System. 

—  35  — 


Broadening  the  Market  for  Acceptances 

The  market  for  acceptances  has  been  considerably  broadened 
by  the  enactment  of  an  amendment  to  the  banking  laws  of  New 
York  State  and  other  States,  permitting  savings  banks,  under  the 
specified  conditions,  to  invest  in  acceptances.  The  amendment  to 
the  New  York  State  law,  which  became  effective  on  April  22,  1918, 
is  as  follows: 

"^Bankers'  acceptances  and  bills  of  exchange  of  the  kind  and 
maturities  made  eligible  by  law  for  rediscount  with  Federal  reserve 
banks,  provided  the  same  are  accepted  by  a  bank,  national  banking 
association  or  trust  company,  incorporated  under  the  laws  of  the 
State  of  New  York  or  under  the  laws  of  the  United  States  and 
having  its  principal  place  of  business  in  the  State  of  New  York. 
Not  more  than  twenty  per  centum  of  the  assets  of  any  savings 
bank,  less  the  amount  of  the  available  fund  held  pursuant  to  the 
provisions  of  Section  251  of  this  Chapter,  shall  be  invested  in  such 
acceptances.  The  aggregate  amount  of  the  liability  of  any  bank, 
national  banking  association  or  trust  company  to  any  savings  bank 
for  acceptances  held  by  such  savings  bank  and  deposits  made  with 
it  shall  not  exceed  twenty-five  per  centum  of  the  paid-up  capital  and 
surplus  of  such  bank,  national  banking  association  or  trust  com- 
pany, and  not  more  than  five  per  centum  of  the  aggregate  amount 
credited  to  the  depositors  of  any  savings  bank  shall  be  invested  in 
the  acceptances  of  or  deposited  with  a  bank,  national  banking 
association  or  trust  company  of  which  a  trustee  of  such  savings 
bank  is  a  director." 

Growth  of  Acceptance  Operations 

The  development  of  the  market  for  acceptances  in  this  country 
is  illustrated  in  the  fifth  annual  report  of  the  Federal  Reserve  Bank 
of  New  York,  covering  the  calendar  year  1919.  In  that  part  of  the 
report  relating  to  acceptances  and  the  discount  market,  the  pur- 
chases of  bankers'  acceptances  and  indorsed  trade  bills  by  the 
bank  for  its  own  account  and  for  the  account  of  other  Federal 
reserve  banks  are  given  by  months,  and  indicate  a  combined  aggre- 
gate of  more  than  $1,960,000,000  for  the  year.  While  there  was  a 
natural  fluctuation  in  the  volume  of  these  operations,  the  general 
tendency  was  unmistakably  in  the  direction  of  expansion,  and  it  is 
also  significant  that  the  amount  of  domestic  trade  bills  discounted 
and  purchased  by  the  bank  increased  nearly  $14,000,000  over  the 
1918  total. 

—  36  — 


In  its  report  covering  operations  for  the  year  1920,  the  Federal 
Reserve  Board  reviews  the  further  development  of  the  acceptance 
market  during  that  period,  in  part,  as  follows : 

"Appreciable  progress  has  been  made  during  the  past  year 
in  the  development  and  broadening  of  the  market  for  bankers' 
acceptances. 

"The  purchases  of  bankers'  acceptances  by  all  the  Federal 
reserve  banks  were  larger  during  1920  by  approximately  $300,- 
000,000  than  in  1919.  This  increase  is  not  excessive  or  remark- 
able, however,  when  consideration  is  given  to  the  large  volume 
of  business  transacted  which  called  for  acceptance  credits  by 
banks  and  bankers.  The  principal  market  into  which  bankers' 
acceptances  flow  from  the  entire  country  is  New  York,  and  it 
follows,  therefore,  that  the  Federal  Reserve  Bank  of  New  York 
must  bear  the  brunt  of  the  burden  of  sustaining  and  developing 
the  market.  This  bank  during  1920  purchased  bankers'  accept- 
ances for  its  own  account  and  for  the  account  of  other  Federal 
reserve  banks  in  value  about  $447,326,000  greater  than  in  1919, 
this  increase  for  the  New  York  bank  being  largely  ofTset  by 
decreases  in  amounts  of  open-market  purchases  by  other  Federal 
reserve  banks  within  their  own -districts. 

"The  pressure  upon  the  Federal  Reserve  Bank  of  New  York, 
caused  by  these  purchases,  has  been  relieved  and  distribution  of 
bills  effected  by  sales  to  member  banks  and  by  allotments  to 
other  Federal  reserve  banks.  The  development  of  the  accept- 
ance market  in  New  York  has  been  aided,  also,  by  special  accept- 
ance service  offered  to  its  member  banks  by  the  Federal  Reserve 
Bank  of  New  York.  The  bank  purchases  for  its  member  banks 
indorsed  bills  of  the  kinds  and  maturities  which  it  is  accustomed 
to  purchase  for  its  own  account,  carries  them  in  custody,  sells 
them  when  desired,  and  collects  them  at  maturity.  This  service 
is  rendered  without  charge,  and  has  made  it  easy  for  any  member 
bank  to  keep  excess  funds  employed  constantly  and  profitably 
through  continued  or  occasional  investments  in  prime  bills." 


-  37-- 


Chapter  VII 


AMENDMENTS  TO  THE  FEDERAL  RESERVE  ACT 


IMPORTANT  amendments,  affecting  acceptances,  were  made  to 
the  Federal  Reserve  Act,  and  became  effective  on  September  7, 
1916,  and  on  June  21,  1917,  on  their  approval  by  the  President. 
Subsequent  amendments  to  the  Act  are  discussed  further  along  in 
this  chapter,  beginning  on  page  43. 

Section  13  of  the  Act  relates  particularly  to  commercial  paper. 
The  changes  made  therein  widen  considerably  the  field  of  banking 
activity,  especially  as  regards  domestic  acceptances  and  bills  of 
exchange.  The  amendments,  therefore,  are  of  noteworthy  interest, 
not  only  to  the  financial  institutions  directly  concerned,  but  to  all 
classes  of  trade  and  industry  doing  business  with  them.  In  this 
and  the  following  paragraphs  quoting  these  amendments,  the 
changes  from  the  wording  of  the  original  Act  of  December  23,  1913. 
are  indicated  by  the  new  matter  being  set  in  heavier  type,  the  words 
stricken  out  being  enclosed  in  brackets : 

"Any  Federal  reserve  bank  may  receive  from  any  of  its 
member  banks,  and  from  the  United  States,  deposits  of  current 
funds  in  lawful  money,  national-bank  notes,  Federal  reserve 
notes,  or  checks,  and  drafts  [upon  solvent-member  banks], 
payable  upon  presentation,  and  also,  for  collection,  maturing 
notes  and  bills;  or,  solely  for  purposes  of  exchange  or  of  col- 
lection, [purposes]  may  receive  from  other  Federal  reserve 
banks  deposits  of  current  funds  in  lawful  money,  national-bank 
notes,  or  checks  [and  drafts]  upon  [solvent-member  or]  other 
Federal  reserve  banks,  and  checks  and  drafts,  payable  upon 
presentation  within  its  district,  and  maturing  notes  and  bills 
payable  within  its  district;  or,  solely  for  the  purposes  of  ex- 
change or  of  collection,  may  receive  from  any  non-member 
bank  or  trust  company  deposits  of  current  funds  in  lawful 
money,  national-bank  notes.  Federal  reserve  notes,  checks  and 

—  38  — 


drafts  payable  upon  presentation,  or  maturing  notes  and  bills: 
Provided,  Such  non-member  bank  or  trust  company  maintains 
with  the  Federal  reserve  bank  of  its  district  a  balance  suffi- 
cient to  offset  the  items  in  transit  held  for  its  account  by  the 
Federal  reserve  bank:  Provided  further.  That  nothing  in  this 
or  any  other  section  of  this  Act  shall  be  construed  as  prohib- 
iting a  member  or  non-member  bank  from  making  reasonable 
charges,  to  be  determined  and  regulated  by  the  Federal  Re- 
serve Board,  but  in  no  case  to  exceed  10  cents  per  $100  or  frac- 
tion thereof,  based  on  the  total  of  checks  and  drafts  presented 
at  any  one  time,  for  collection  or  payment  of  checks  and  drafts 
and  remission  therefor  by  exchange  or  otherw^ise;  but  no  such 
charges  shall  be  made  against  the  Federal  reserve  banks. 

"Upon  the  indorsement  of  any  of  its  member  banks,  which 
shall  be  deemed  [with]  a  waiver  of  demand,  notice  and  protest 
by  such  bank  as  to  its  own  indorsement  exclusively,  any  Fed- 
eral reserve  bank  may  discount  notes,  drafts,  and  bills  of  ex- 
change arising  out  of  actual  commercial  transactions;  that  is, 
notes,  drafts,  and  bills  of  exchange  issued  or  drawn  for  agri- 
cultural, industrial,  or  commercial  purposes,  or  the  proceeds  of 
which  have  been  used,  or  are  to  be  used,  for  such  purposes, 
the  Federal  Reserve  Board  to  have  the  right  to  determine  or 
define  the  character  of  the  paper  thus  eligible  for  discount, 
within  the  meaning  of  this  Act.  Nothing  in  this  Act  contained 
shall  be  construed  to  prohibit  such  notes,  drafts,  and  bills  of 
exchange ,  secured  by  staple  agricultural  products,  or  other 
goods,  wares,  or  merchandise  from  being  eligible  for  such  dis- 
count; but  such  definition  shall  not  include  notes,  drafts,  or 
bills  covering  merely  investments  or  issued  or  drawn  for  the 
purpose  of  carrying  or  trading  in  stocks,  bonds,  or  other  in- 
vestment securities,  except  bonds  and  notes  of  the  Govern- 
ment of  the  United  States.  Notes,  drafts,  and  bills  admitted-  to 
discount  under  the  terms  of  this  paragraph  must  have  a  ma- 
turity at  the  time  of  discount  of  not  more  than  ninety  days, 
exclusive  of  days  of  grace; 

"Provided,  That  notes,  drafts,  and  bills  drawn  or  issued  for 
agricultural  purposes  or  based  on  live  stock  and  having  a  ma- 
turity not  exceeding  six  months,  exclusive  of  days  of  grace, 
may  be  discounted  in  an  amount  to  be  limited  to  a  percentage 
of  the  [capital]  assets  of  the  Federal  reserve  bank,  to  be  ascer- 
tained and  fixed  by  the  Federal  Reserve  Board." 

The  next  succeeding  paragrapli  of  the  original  Act,  beginning: 
"Any  Federal  reserve  bank  may  discount  acceptances  which  are 
based  on  the  importation  or  exportation  of  goods,"  etc.,  is  stricken 
out  entirely. 

—  39  — 


The  paragraph  that  follows  is  changed  as  indicated  by  the  type 

"The  aggregate  of  such  notes,  drafts,  and  bills  bearing  the 
signature  or  indorsement  of  any  one  borrower,  whether  a  per- 
son, company,  firm,  or  corporation,  rediscounted  for  any  one 
bank,  shall  at  no  time  exceed  ten  per  centum  of  the  unimpaired 
capital  and  surplus  of  said  bank;  but  this  restriction  sliall 
not  apply  to  the  discount  of  bills  of  exchange  drawn  in  good 
faith  against  actually  existing  values." 

The  next  paragraph  is  entirely  new : 

"Any  Federal  reserve  bank  may  discount  acceptances  of 
the  kinds  hereinafter  described,  which  have  a  maturity  at  the 
time  of  discount  of  not  more  than  three  months'  sight,  ex- 
clusive of  days  of  grace,  and  which  are  indorsed  by  at  least 
one  member  bank." 


Banks  May  Now  Accept  in  Domestic  Transactions 

It  will  be  seen  that  the  paragraph  which  next  follows  has 
been  decidedly  changed.  In  its  original  form,  it  authorized  the 
acceptance  of  drafts  or  bills  of  exchange  only  when  they  originated 
in  transactions  involving  the  importation  and  exportation  of  goods. 
As  amended,  this  portion  of  the  lavv^  now  permits  banks,  under 
the  conditions  specified,  also  to  accept  similar  commercial  paper 
growing  out  of  transactions  involving  the  domestic  shipment  of 
goods.  This,  it  is  obvious,  broadens  to  a  remarkable  degree  the  field 
for  the  use  of  trade  acceptances.  The  paragraph,  with  the  addi- 
tions and  changes  shown,  reads  as  follows : 

"Any  member  bank  may  accept  drafts  or  bills  of  exchange 
drawn  upon  it  [and  growing  out  of  transactions  involving 
the  importation  or  exportation  of  goods]  having  not  more 
than  six  months'  sight  to  run,  exclusive  of  days  of  grace,  which 
grow  out  of  transactions  involving  the  importation  or  exporta- 
tion of  goods;  or  which  grow  out  of  transactions  involving 
the  domestic  shipment  of  goods,  provided  shipping  documents 
conveying  or  securing  title  are  attached  at  the  time  of  accept- 
ance; or  which  are  secured  at  the  time  of  acceptance  by  a 
warehouse  receipt  or  other  such  document  conveying  or  secur- 
ing title  covering  readily-marketable  staples.  No  member 
bank  shall  accept,  v/hether  in  a  foreign  or  domestic  transac- 
tion, for  any  one  person,  company,  firm,  or  corporation  to  an 

—  40  — 


amount  equal  at  any  time  in  the  aggregate  to  more  than  ten 
per  centum  of  its  paid-up  and  unimpaired  capital  stock  and 
surplus,  unless  the  bank  is  secured  either  by  attached  docu- 
ments or  by  some  other  actual  security  growing  out  of  the 
same  transaction  as  the  acceptance;  and  [but]  no  bank  shall 
accept  such  bills  to  an  amount  equal  at  any  time  in  the  aggre- 
gate to  more  than  one-half  of  its  paid-up  and  unimpaired 
capital  stock  and  surplus:  Provided,  however,  That  the  Fed- 
eral Reserve  Board,  under  such  general  regulations  as  it  may 
prescribe,  which  shall  apply  to  all  banks  aUke  regardless  of 
the  amount  of  capital  stock  and  surplus,  may  authorize  any 
member  bank  to  accept  such  bills  to  an  amount  not  exceed- 
ing at  any  time  in  the  aggregate  one  hundred  per  centum  of 
its  paid-up  and  unimpaired  capital  stock  and  surplus:  Pro- 
vided, further.  That  the  aggregate  of  acceptances  growing  out 
of  domestic  transactions  shall  in  no  event  exceed  fifty  per 
centum  of  such  capital  stock  and  surplus." 


Authorized  Collateral  for  Reserve  Bank  Advances 

Then  comes  another  entirely  new  paragraph  defining  the  man- 
ner in  which  one  bank  may  lend  to  another  on  the  security  of  notes, 
drafts,  bills  of  exchange,  bankers'  acceptances,  or  other  authorized 
collateral.    It  reads : 

"Any  Federal  reserve  bank  may  make  advances  to  its  mem- 
ber banks  on  their  promissory  notes  for  a  period  not  exceed- 
ing fifteen  days  at  rates  to  be  established  by  such  Federal 
reserve  banks,  subject  to  the  review  and  determination  of  the 
Federal  Reserve  Board,  provided  such  promissory  notes  are 
secured  by  such  notes,  drafts,  bills  of  exchange,  or  bankers' 
acceptances  as  are  eligible  for  rediscount  or  for  purchase  by 
Federal  reserve  banks  under  the  provisions  of  this  Act,  or  by 
the  deposit  or  pledge  of  bonds  or  notes  of  the  United  States." 

The  next  paragraph  regarding  the  amendment  of  Section  5202 
of  the  Revised  Statutes  of  the  United  States  remains  unchanged. 
The  section  that  follows  is  changed  slightly  to  make  it  cover  the 
widened  purposes  of  the  Act: 

"The  discount  and  rediscount  a'nd  the  purchase  and  sale 
by  any  Federal  reserve  bank  of  any  bills  receivable  and  of 
domestic  and  foreign  bills  of  exchange,  and  of  acceptances 
authorized  by  this  Act,  shall  be  subject  to  such  restrictions, 
limitations,  and  regulations  as  may  be  imposed  by  the  Federal 
Reserve  Board." 

—  41  — 


Possibilities  for  Extension  of  "Dollar  Exchange'' 

The  paragraph  which  follows  is  also  new,  and  opens  greater 
possibilities  for  the  extension  of  "dollar  exchange"  in  commercial 
transactions  with  other  countries.  As  has  been  previously  shown, 
"dollar  exchange"  gives  the  American  exporter  an  advantage  that 
he  has  never  before  enjoyed — that  of  dealing  with  foreign  buyers 
and  sellers  in  his  own  domestic  currency,  thereby  saving  the  extra 
cost  of  exchange  on  London,  or  the  other  great  commercial  centers 
abroad,  and  other  expenses.  This  section  of  the  Act  reads  as 
follows : 

"Any  member  bank  may  accept  drafts  or  bills  of  exchange 
drawn  upon  it  having  not  more  than  three  months'  sight  to 
run,  exclusive  of  days  of  grace,  drawn  under  regulations  to  be 
prescribed  by  the  Federal  Reserve  Board  by  banks  or  bankers 
in  foreign  countries  or  dependencies  or  insular  possessions  of 
the  United  States  for  the  purpose  of  furnishing  dollar  exchange 
as  required  by  the  usages  of  trade  in  the  respective  countries, 
dependencies,  or  insular  possessions.  Such  drafts  or  bills  may 
be  acquired  by  Federal  reserve  banks  in  such  amounts  and  sub- 
ject to  such  regulations,  restrictions,  and  limitations  as  may 
be  prescribed  by  the  Federal  Reserve  Board:  Provided,  however. 
That  no  member  bank  shall  accept  such  drafts  or  bills  of 
exchange  referred  to  in  this  paragraph  for  any  one  bank  to  an 
amount  exceeding  ih  the  aggregate  ten  per  centum  of  the  paid-up 
and  unimpaired  capital  and  surplus  of  the  accepting  bank  unless 
the  draft  or  bill  of  exchange  is  accompanied  by  documents  con- 
veying or  securing  title  or  by  some  other  adequate  security: 
Provided,  further,  That  no  member  bank  shall  accept  such 
drafts  or  bills  in  an  amount  exceeding  at  any  time  the  aggre- 
gate of  one-half  of  its  paid-up  and  unimpaired  capital  and 
surplus." 

Sub-section  (e)  of  Section  14  of  the  original  Act  is  changed 
as  indicated  herewith : 


Establishment  of  Banking  Connections 

"(e)  To  establish  accounts  with  other  Federal  reserve 
banks  for  exchange  purposes  and,  with  the  consent  [of  the 
Federal  Reserve  Board]  or  upon  the  order  and  direction  of 
the  Federal  Reserve  Board  and  under  regulations  to  be  pre- 
scribed  by   said    Board,    to    open    and    maintain    [banking]    ac- 

—  42  — 


counts  in  foreign  countries,  appoint  correspondents,  and  estab- 
lish agencies  in  such  countries  wheresoever  it  may  be  deemed 
best  for  the  purpose  of  purchasing,  selhng,  and  collecting 
bills  of  exchange,  and  to  buy  and  sell,  with  or  without  its 
indorsement,  through  such  correspondents  or  agencies,  bills  of 
exchange  (or  acceptances)  arising  out  of  actual  commercial 
transactions  which  have  not  more  than  ninety  days  to  run, 
exclusive  of  days  of  grace,  and  which  bear  the  signature  of 
two  or  more  responsible  parties,  and,  with  the  consent  of  the 
Federal  Reserve  Board,  to  open  and  maintain  banking  ac- 
counts for  such  foreign  correspondents  or  agencies.  When- 
ever any  such  account  has  been  opened  or  agency  or  corre- 
spondent has  been  appointed  by  a  Federal  reserve  bank,  with 
the  consent  of  or  imder  the  order  and  direction  of  the  Federal 
Reserve  Board,  any  other  Federal  reserve  bank  may,  with  the 
consent  and  approval  of  the  Federal  Reserve  Board,  be  per-^ 
mitted  to  carry  on  or  conduct,  through  the  Federal  reserve 
bank  opening  such  account  or  appointing  such  agency  or  cor- 
respondent, any  transaction  authorized  by  this  section  under 
rules  and  regulations  to  be  prescribed  by  the  Board." 

The  second  paragraph  of  Section  16  is  amplified  by  adding 
drafts,  bills  of  exchange,  or  acceptances  to  the  collateral  security 
that  may  be  offered  for  Federal  reserve  notes. 


Additional  Amendments  to  the  Act 

Several  amendments  to  the  Federal  Reserve  Act  and  to  the 
Revised  Statutes  vi^ere  made  during  the  year  1918,  but  these 
changes  do  not  call  for  extended  comment  here. 

Under  the  terms  of  Section  13  of  the  Act  approved  April  5, 
1918,  known  as  the  War  Finance  Act,  the  Federal  reserve  banks 
were  authorized  to  discount  direct  obligations  of  member  banks 
secured  by  bonds  of  the  War  Finance  Corporation,  and  to  use  notes 
so  secured,  if  it  became  necessary,  as  a  basis  for  Federal  reserve 
notes.  Section  15  empowered  the  Federal  reserve  banks  to  act  as 
fiscal  agents  and  depositaries  of  the  War  Finance  Corporation, 
while  Section  20  amended  Section  5202,  Revised  Statutes,  so  as  to 
exempt  from  the  liabilities  which  may  be  incurred  by  a  national 
bank  those  incurred  under  the  provisions  of  the  War  Finance  Act. 

The  Act  of  September  24,  1918,  amended  Section  5200,  Re- 
vised Statutes,  which  section  limits  the  amount  that  may  be  loaned 

—  43  — 


by  any  national  bank  to  any  one  person  to  10  per  cent,  of  the  capital 
and  surplus  of  the  lending  bank.  By  the  new  amendment,  loans 
secured  by  Liberty  bonds  were  made  exempt  under  certain  condi- 
tions from  this  limitation.  The  Trading  with  the  Enemy  Act,  as 
amended  September  24,  1918,  authorized  the  President  to  use  such 
agencies  as  he  might  select  to  regulate  foreign  exchange  operations. 
This  was  essentially  a  war  measure,  and  is  no  longer  in  use. 

Other  amendments  to  the  Federal  Reserve  Act  that  were  made 
efifective  in  1918  have  no  direct  bearing  on  the  subject  of  which  this 
booklet  treats. 


Reserve  Banks'  Discount  Powers  Broadened 

During  1919,  the  Act  was  amended  three  times,  while  further 
changes  were  made  in  different  sections  of  the  Revised  Statutes. 

By  the  substitution  of  a  new  subsection  (m),  approved  March  3, 
1919,  Section  11  of  the  Federal  Reserve  Act  was  amended  so  as 
to  authorize  the  Federal  Reserve  Board,  upon  the  affirmative  vote 
of  not  less  than  five  of  its  members,  to  permit  Federal  reserve  banks 
to  discount  for  any  member  bank  paper  bearing  the  signature 
or  indorsement  of  any  one  borrower  in  excess  of  the  amount  there- 
tofore permitted  under  Section  9  and  Section  13  of  the  Act.  The 
amendment  provided,  however,  that  in  no  case  should  the  paper  so 
discounted  exceed  20  per  cent,  of  the  member  bank's  capital  and 
surplus,  and  it  was  also  stipulated  that  all  of  the  paper  discounted 
for  any  member  bank  in  excess  of  the  amount  theretofore  per- 
mitted by  law  should  be  secured  by  not  less  than  a  like  face  amount 
of  bonds  or  notes  of  the  United  States  issued  since  April  24,  1917, 
or  by  certificates  of  indebtedness  of  the  United  States. 

This  amendment,  which  was  designed  to  broaden  the  dis- 
count powers  of  Federal  reserve  banks  to  correspond  to  the  lend- 
ing power  of  the  national  banks  as  enlarged  by  the  Act  of  Septem- 
ber 24,  1918,  became  inoperative  after  December  31,  1920.  Prior  to 
the  latter  date,  however,  a  new  amendment,  extending  the  provision 
permitting  Federal  reserve  banks  to  discount  for  a  member  bank, 
under  the  specified  conditions,  paper  up  to  20  per  cent,  of  the  mem- 
ber bank's  capital  and  surplus,  was  introduced  in  Congress.  After 
considerable  delay,  this  amendment  was  passed  by  both  the  House 

—  44  — 


and  Senate,  and  became  a  law  on  February  27,  1921,  upon  its 
approval  by  the  President.  The  new  amendment  stipulates  that 
paper  discounted  for  any  member  bank  in  excess  of  the  amount 
permitted  under  Section  9  and  Section  13  shall  be  secured  by  not 
less  than  a  like  face  amount  of  bonds  or  notes  of  the  United  States 
issued  since  April  24,  1917,  "for  which  the  borrower  shall  in  good 
faith  prior  to  January  1,  1921,  have  paid  or  agreed  to  pay  not  less 
than  the  full  face  amount  thereof,"  or  certificates  of  indebtedness 
of  the  United  States.  The  provisions  of  this  new  subsection  (m), 
it  is  important  to  note,  become  inoperative  after  October  31,  1921. 


Investments  of  National  Banks 

The  Act  of  September  17,  1919,  amended  Section  25  so  as  to 
permit  any  national  banking  association,  until  January  1,  1921, 
irrespective  of  the  amount  of  its  capital  and  surplus,  to  apply  to 
the  Federal  Reserve  Board  for  permission  to  invest  an  amount  not 
exceeding  in  the  aggregate  5  per  cent,  of  its  capital  and  surplus  in 
the  stock  of  one  or  more  corporations  chartered  or  incorporated 
under  the  laws  of  the  United  States  or  of  any  State  thereof  and 
principally  engaged  in  such  phases  of  international  or  foreign 
financial  operations  as  may  be  necessary  to  facilitate  the  export 
of  goods.  This  5  per  cent,  limit  was  changed  by  the  enactment  of 
Section  25  (a),  so  far  as  corporations  organized  under  Federal  law 
are  concerned.  The  latter  Act,  known  as  the  Edge  Bill,  permits 
any  national  banking  association  to  invest  a  larger  amount  than 
5  per  cent,  in  the  stock  of  any  corporation  organized  under  its  pro- 
visions, but  the  aggregate  amount  of  stock  held  in  all  corporations 
engaged  in  business  of  the  kind  described  in  the  Act  and  in  Section 
25,  as  amended,  shall  not  exceed  10  per  cent,  of  the  subscribing 
bank's  capital  and  surplus.  A  part  of  Section  25,  as  amended  by 
the  Act  of  September  17,  1919,  reads  as  follows : 

"Until  January  1,  1921,  any  national  banking  association, 
without  regard  to  the  amount  of  its  capital  and  surplus,  may  file 
application  with  the  Federal  Reserve  Board  for  permission,  upon 
such  conditions  and  under  such  regulations  as  may  be  prescribed 
by  said  Board,  to  invest  an  amount  not  exceeding  in  the  aggre- 
gate 5  per  centum  of  its  paid-in  capital  and  surplus  in  the  stock 
of  one  or  more  corporations  chartered  or  incorporated  under  the 

—  45  — 


laws  of  the  United  States  or  of  any  State  thereof,  and,  regard- 
less of  its  location,  principally  engaged  in  such  phases  of  inter- 
national or  foreign  financial  operations  as  may  be  necessary  to 
facilitate  the  export  of  goods,  wares,  or  merchandise  from  the 
United  States  or  any  of  its  dependencies  or  insular  possessions 
to  any  foreign  country:  Provided,  however,  That  in  no  event 
shall  the  total  investments  authorized  by  this  section  by  any  one 
national  bank  exceed  10  per  centum  of  its  capital  and  surplus." 

The  Act  known  as  the  Edge  Bill,  which  was  approved 
December  24,  1919,  is  discussed  at  length  in  Chapter  X  of  this 
booklet,  and  consequently  is  not  given  here. 


Amendments  to  Revised  Statutes 

Besides  the  amendments  to  the  Federal  Reserve  Act  previously 
discussed,  changes  in  Section  5200  and  Section  5202  of  the  Revised 
Statutes  were  made  by  the  Act  approved  October  22,  1919. 

As  amended.  Section  5200,  Revised  Statutes,  permits  a  national 
bank  to  lend  to  any  one  borrower  in  excess  of  10  per  cent,  of  its 
capital  and  surplus,  but  not  to  exceed  25  per  cent.  It  is  provided 
that  loans  over  and  above  10  per  cent,  must  be  represented  by  notes 
secured  by  shipping  documents,  warehouse  receipts,  or  other  such 
documents  conveying  or  securing  title  covering  readily-marketable, 
non-perishable  staples,  including  live  stock.  The  actual  market 
value  of  the  property  securing  the  obligation  must  not  at  any  time 
be  less  than  115  per  cent,  of  the  face  amount  of  the  loan,  and  the 
property  must  be  fully  covered  by  insurance.  It  is  stipulated  in  the 
Act,  moreover,  that  the  privilege  of  lending  in  excess  of  10  per 
cent,  of  the  bank's  capital  and  surplus  upon  notes  secured  in  the 
manner  described  shall  not  apply  to  any  one  borrower  for  more 
than  six  months  in  any  consecutive  twelve  months.  Section  5200 
of  the  Revised  Statutes,  as  amended,  reads  as  follows : 

"The  total  liabilities  to  any  association  of  any  person  or  of 
any  company,  corporation,  or  firm  for  money  borrowed,  in- 
cluding in  the  liabilities  of  a  company  or  firm  the  liabilities 
of  the  several  members  thereof,  shall  at  no  time  exceed  10  per 
centum  of  the  amount  of  the  capital  stock  of  such  association, 
actually  paid  in  and  unimpaired,  and  10  per  centum  of  its  un- 
impaired surplus  fund:  Provided,  however,  That  (1)  the  discount 

—  46  — 


of  bills  of  exchange  drawn  in  good  faith  against  actually  exists 
ing  values,  including  drafts  and  bills  of  exchange  secured  by 
shipping  documents  conveying  or  securing  title  to  goods  shipped, 
and  including  demand  obligations  when  secured  by  documents 
covering  commodities  in  actual  process  of  shipment,  and  also  in- 
cluding bankers'  acceptances  of  the  kinds  described  in  Section  13 
of  the  Federal  Reserve  Act,  (2)  the  discount  of  commercial  or 
business  paper  actually  owned  by  the  person,  company,  cor- 
poration, or  firm  negotiating  the  same,  (3)  the  discount  of  notes 
secured  by  shipping  documents,  warehouse  receipts,  or  other 
such  documents  conveying  or  securing  title  covering  readily- 
marketable,  non-perishable  staples,  including  live  stock,  when  the 
actual  market  value  of  the  property  securing  the  obligation  is 
not  at  any  time  less  than  115  per  centum  of  the  face  amount  of 
the  notes  secured  by  such  documents  and  when  such  property 
is  fully  covered  by  insurance,  and  (4)  the  discount  of  any  note 
or  notes  secured  by  not  less  than  a  like  face  amount  of  bonds  or 
notes  of  the  United  States  issued  since  April  24,  1917,  or  certifi- 
cates of  indebtedness  of  the  United  States,  shall  not  be  consid- 
ered as  money  borrowed  within  the  meaning  of  this  section. 

"The  total  liabilities  to  any  association,  of  any  person  or  of 
any  corporation,  or  firm,  or  company,  or  the  several  members 
thereof  upon  any  note  or  notes  purchased  or  discounted  by 
such  association  and  secured  by  bonds,  notes,  or  certificates 
of  indebtedness  as  described  in  (4)  hereof  shall  not  exceed 
("except  to  the  extent  permitted  by  rules  and  regulations  pre- 
scribed by  the  Comptroller  of  the  Currency,  with  the  approval 
of  the  Secretary  of  the  Treasury)  10  per  centum  of  such  capital 
stock  and  surplus  fund  of  such  association  and  the  total  lia- 
bilities to  any  association  of  any  person  or  of  any  corporation, 
or  firm,  or  company,  or  the  several  members  thereof  for  money 
borrowed,  including  the  liabilities  upon  notes  secured  in  the 
manner  described  under  (3)  hereof,  except  transactions  (1),  (2), 
and  (4),  shall  not  at  any  time  exceed  25  per  centum  of  the 
amount  of  the  association's  paid-in  and  unimpaired  capital  stock 
and  surplus.  The  exception  made  under  (3)  hereof  shall  not 
apply  to  the  notes  of  any  one  person,  corporation,  or  firm  or 
company,  or  the  several  members  thereof  for  more  than  six 
months  in  any  consecutive  twelve  months." 

The  Act  of  October  22,  1919,  also  amended  Section  5202. 
Revised  Statutes,  by  excepting  from  the  limitations  upon  the 
amount  for  which  any  national  bank  may  be  liable  at  any  one  time 
those  "liabilities  created  by  the  indorsement  of  accepted  bills  of 
exchange  payable  abroad  actually  owned  by  the  indorsing  bank  and 
discounted  at  home  or  abroad." 

—  47  — 


Controlling  Credit  Through  Discount  Rates 

In  discussing  the  question  of  regulation  and  control  of  credit 
in  its  annual  report  for  1919,  the  Federal  Reserve  Board  made  the 
recommendation  that  an  additional  power  be  granted  it  through 
the  insertion  of  a  clause  in  subdivision  (d),  Section  14  of  the 
Federal  Reserve  Act,  providing  that  each  Federal  reserve  bank, 
with  the  approval  of  the  Board,  be  permitted  to  determine  by  uni- 
form rule,  applicable  to  all  its  member  banks  alike,  the  normal 
maximum  rediscount  line  of  each  member  bank.  It  was  further 
suggested  that  each  Federal  reserve  bank  be  allowed  to  submit  for 
the  review  and  determination  of  the  Board  graduated  rates  on  an 
ascending  scale  to  apply  equally  and  ratably  to  all  its  member 
banks  rediscounting  amounts  in  excess  of  the  normal  line  so 
determined. 

The  opinion  was  expressed  by  the  Board  that  it  would  thus  be 
possible  to  curtail  excessive  borrowings  of  member  banks,  and  to 
induce  them  to  hold  their  own  large  borrowers  in  check  without 
advancing  the  basic  rate.  There  was  then  no  authority,  the  Board 
pointed  out,  for  fixing  graduated  rates  based  upon  the  total  borrow- 
ings of  a  member  bank,  so  that  if  it  became  necessary  to  increase 
the  discount  rate  in  order  to  curb  the  demands  of  those  banks  re- 
discounting  in  very  large  amounts,  the  same  rate  would  apply  to 
the  requirements  of  other  member  banks  who  might  rediscount 
infrequently,  and  never  excessively.  Hence,  the  raising  of  rates  as 
a  corrective  to  certain  banks  tended  to  work  a  hardship  on  banks 
and  borrowers  who  were  conducting  their  affairs  within  the  limits 
of  moderation. 

The  recommendations  of  the  Federal  Reserve  Board  in  the 
matter  of  the  control  of  credit,  as  previously  outlined,  were  finally 
incorporated  in  a  bill — the  Phelan  Bill — and  on  April  13,  1920,  this 
measure  was  made  a  law  upon  its  approval  by  the  President.  As 
enacted,  the  amendment  to  Section  14  reads  as  follows : 

"That  Section  14  of  the  Federal  Reserve  Act  as  amended 
by  the  Acts  approved  September  7,  1916,  and  June  21,  1917, 
be  further  amended  by  striking  out  the  semicolon  after  the 
word  'business'  at  the  end  of  subparagraph  (d)  and  insert  in 
lieu  thereof  the  following:  'and  which,  subject  to  the  approval, 
review,  and  determination  of  the  Federal  Reserve  Board,  may 
be  graduated  or  progressed  on  the  basis  of  the  amount  of  the 

—  48  — 


advances  and  discount  accommodations  extended  by  the  Fed- 
eral reserve  bank  to  the  borrowing  bank.'" 

It  is  important  to  note  that  this  new  provision  is  permissive, 
and  not  mandatory,  its  purpose  being  to  authorize  Federal  reserve 
banks,  subject  to  the  approval  of  the  Federal  Reserve  Board,  to 
establish  a  "line  of  credit"  or  discount  accommodation  for  each 
member  bank.  Where  banks  exceed  this  limit  in  their  applications, 
it  is  intended  to  check  the  undue  enlargement  of  such  applications 
by  a  progressively  growing  rate. 


—  49  — 


Chapter  VIII 


REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 


THE  text  of  the  regulations  issued  by  the  Federal  Reserve 
Board  relating  to  commercial  paper  is  of  vital  interest  to  mer- 
chants and  manufacturers,  as  well  as  to  bankers.  A  part  of  Section 
13  of  the  Federal  Reserve  Act,  as  previously  shown,  reads  as 
follows : 

"Upon  the  indorsement  of  any  of  its  member  banks,  which 
shall  be  deemed  a  waiver  of  demand,  notice  and  protest  by 
such  bank  as  to  its  own  indorsement  exclusively,  any  Federal 
reserve  bank  may  discount  notes,  drafts,  and  bills  of  exchange 
arising  out  of  actual  commercial  transactions;  that  is,  notes, 
drafts,  and  bills  of  exchange  issued  or  drawn  for  agricultural, 
industrial  or  commercial  purposes,  or  the  proceeds  of  which 
have  been  used,  or  are  to  be  used,  for  such  purposes,  the  Fed- 
eral Reserve  Board  to  have  the  right  to  determine  or  define 
the  character  of  the  paper  thus  eligible  for  discount,  within 
the  meaning  of  this  Act.  Nothing  in  this  Act  contained  shall 
be  construed  to  prohibit  such  notes,  drafts,  and  bills  of  ex- 
change, secured  by  staple  agricultural  products,  or  other  goods, 
wares,  or  merchandise  from  being  eligible  for  such  discount; 
but  such  definition  shall  not  include  notes,  drafts,  or  bills  cov- 
ering merely  investments  or  issued  or  drawn  for  the  purpose 
of  carrying  or  trading  in  stocks,  bonds,  or  other  investment 
securities,  except  bonds  and  notes  of  the  Government  of  the 
United  States.  Notes,  drafts,  and  bills  admitted  to  discount 
under  the  terms  of  this  paragraph  must  have  a  maturity  at  the 
time  of  discount  of  not  more  than  ninety  days,  exclusive  of 
days  of  grace:  Provided,  That  notes,  drafts,  and  bills  drawn 
or  issued  for  agricultural  purposes  or  based  on  live  stock  and 
having  a  maturity  not  exceeding  six  months,  exclusive  of  days 
of  grace,  may  be  discounted  in  an  amount  to  be  limited  to  the 
percentage  of  the  assets  of  the  Federal  reserve  bank,  to  be 
ascertained  and  fixed  by  the  Federal  Reserve  Board. 

—  50  — 


"The  aggregate  of  such  notes,  drafts,  and  bills  bearing  the 
signature  or  indorsement  of  any  one  borrower,  whether  a  per- 
son, company,  firm,  or  corporation,  rediscounted  for  any  one 
bank  shall  at  no  time  exceed  ten  per  centum  of  the  unimpaired 
capital  and  surplus  of  said  bank;  but  this  restriction  shall  not 
applj'  to  the  discount  of  bills  of  exchange  drawn  in  good  faith 
against  actually  existing  values. 

"Any  Federal  reserve  bank  may  discount  acceptances  of  the 
kinds  hereinafter  described,  which  have  a  maturity  at  the  time 
of  discount  of  not  more  than  three  months'  sight,  exclusive  of 
days  of  grace,  and  which  are  indorsed  by  at  least  one  member 
bank." 

The  paragraph  which  next  follows  in  Section  13  permits  mem- 
ber banks,  under  the  specified  conditions,  to  accept  drafts  or  bills 
of  exchange  growing  out  of  transactions  involving  the  importation 
or  exportation  of  goods,  or  the  domestic  shipment  of  goods. 

"Section  14.  Any  Federal  reserve  bank  may,  under  rules 
and  regulations  prescribed  by  the  Federal  Reserve  Board,  pur- 
chase and  sell  in  the  open  market,  at  home  or  abroad,  either 
from  or  to  domestic  or  foreign  banks,  firms,  corporations  or 
individuals,  cable  transfers  and  bankers'  acceptances  and  bills 
of  exchange  of  the  kinds  and  maturities  by  this  Act  made  eligi- 
ble for  rediscount,  with  or  without  the  indorsement  of  a  mem- 
ber bank. 

"Every  Federal  reserve  bank  shall  have  power: 

"(c)  To  purchase  from  member  banks  and  to  sell,  with  or 
without  its  indorsement,  bills  of  exchange  arising  out  of  com- 
mercial transactions,  as  hereinbefore  defined ; 

"(d)  To  establish  from  time  to  time,  subject  to  review  and 
determination  of  the  Federal  Reserve  Board,  rates  of  discount 
to  be  charged  by  the  Federal  reserve  bank  for  each  class  of 
paper,  which  shall  be  fixed  with  a  view  of  accommodating  com- 
merce and  business; 

"(e)  To  establish  accounts  with  other  Federal  reserve  banks 
for  exchange  purposes  and,  with  the  consent  or  upon  the  order 
and  direction  of  the  Federal  Reserve  Board  and  under  regulations 
to  be  prescribed  by  said  Board,  to  open  and  maintain  accounts  in 
foreign  countries,  appoint  correspondents,  and  establish  agencies 
in  such  countries  wheresoever  it  may  deem  best  for  the  purpose 
of  purchasing,  selling  and  collecting  bills  of  exchange,  and  to  buy 
and  sell,  with  or  without  its  indorsement  through  such  correspond- 
ents or  agencies,  bills  of  exchange  (or  acceptances)  arising  out  of 
actual  commercial  transactions  which  have  not  more  than  ninety 
days  to  run,  exclusive  of  days  of  grace,  and  which  bear  the  signa- 

-51  — 


ture  of  two  or  mote  responsible  parties,  and,  with  the  consent 
of  the  Federal  Reserve  Board,  to  open  and  maintain  banking  ac- 
counts  for  such   foreign   correspondents   or  agencies.     .     .     ." 


Powers  of  New  York  State  Banks 

In  order  that  banks  and  trust  companies  in  New  York  State 
may  have  similar  powers,  the  revised  banking  law  of  the  State 
permits  a  State  bank  or  trust  company  to  accept  for  payment  at 
a  future  date,  drafts  drawn  upon  it  by  its  customers  and  to  issue 
letters  of  credit  authorizing  the  holders  thereof  to  draw  drafts  upon 
it  or  its  correspondents  at  sight  or  on  time,  not  exceeding  one  year. 

Under  the  New  York  Act,  there  are  no  restrictions  as  to  the 
origin  of  the  paper.  New  York  State  banks  are  not  limited  as  to 
the  amount  of  acceptances  they  may  make  in  total,  although  they 
are  not  allowed  to  loan  by  way  of  any  extension  of  credit,  by  means 
of  letters  of  credit  or  by  acceptances,  more  than  one-tenth  part  of 
the  capital  and  surplus  to  any  individual,  partnership,  corporation 
or  unincorporated  association,  etc.  Banks  in  the  Federal  Reserve 
System  may  not  accept  paper  running  longer  than  six  months, 
while  New  York  State  banks  may  accept  up  to  one  year. 


Desirability  of  Bills  of  Exchange 

From  the  foregoing  quotation  from  the  Federal  Reserve  Act, 
it  will  be  seen  that  one  of  its  most  valuable  features  is  its  re- 
habilitation of  bills  of  exchange  by  the  establishment  of  rediscount 
facilities.  It  places  the  banking  system  of  the  United  States  on 
a  similar  basis  to  that  of  other  civilized  countries  that  make  prime 
commercial  paper  the  foundation  of  their  loan  business.  In  its 
interpretations  of  the  Act,  the  Federal  Reserve  Board  has  ma- 
terially assisted  in  the  movement  to  educate  American  commerce 
to  use  the  bill  of  exchange  even  in  small  transactions. 

The  first  regulations  of  the  Board,  issued  November  10,  1914, 
outlining  its  discount  policy,  are  evidence  of  such  intention.  Un- 
der the  heading  "Commercial  Paper,"  paragraph  C,  the  Board 
then  said: 

—  52  — 


"Bills  should  be  essentially  self-liquidating.  Safety  requires 
not  only  that  bills  held  by  the  Federal  reserve  banks  should  be  of 
short  and  well-distributed  maturities,  but,  in  addition,  should  be 
of  such  character  that  it  is  reasonably  certain  that  they  can  be 
collected  when  they  mature.  They  ought  to  be  essentially  'self- 
liquidating,'  or,  in  other  words,  should  represent  in  every  case 
some  distinct  step  or  stage  in  the  productive  or  distributive  process 
— the  progression  of  goods  from  producer  to  consumer.  The 
more  nearly  these  steps  approach  the  final  consumer,  the  smaller 
will  be  the  amount  nivolved  in  each  transaction  as  represented  by 
the  bill,  and  the  more  automatically  self-liquidating  will  be  its 
character." 

The  last  sentence  is  particularly  significant  as  applying  even 
to  the  retail  trade.  Again,  the  Board  points  out  its  preference  for 
bills  of  exchange  as  against  ordinary  notes  of  hand. 

"Double-name  paper  drawn  on  a  purchaser  against  an  actual 
sale  of  goods  affords,  from  an  economic  point  of  view,  prima 
facie  evidence  of  the  character  of  the  transaction  from  which 
it  arose.  Single-name  notes,  now  so  freely  used  in  the  United 
States,  may  represent  the  same  kind  of  transactions  as  those 
bearing  two  names.  Inasmuch,  however,  as  the  single-name  paper 
does  not  show  on  its  face  the  character  of  the  transaction  out  of 
which  it  arose — an  admitted  weakness  of  this  form  of  paper — it  is 
incumbent  upon  each  Federal  reserve  bank  to  insist  that  the  char- 
acter of  the  business  and  tlie  general  status  of  the  concern  supply- 
ing such  paper  should  be  carefully  examined  in  order  that  the  dis- 
counting bank  may  be  certain  that  no  such  single-name  paper  has 
been  issued  for  purposes  excluded  by  the  Act,  such  as  investments 
of  a  permanent  or  speculative  nature.  Only  careful  inquiry  on 
these  points  will  render  it  safe  and  proper  for  a  Federal  reserve 
bank  to  consider  such  paper  a  'self-liquidating'  investment  at 
maturity." 


Scope  of  Acceptances  Extended 

Thus,  the  Board  clearly  places  a  premium  on  bills  of  exchange, 
and  indicates  their  great  desirability. 

The  Federal  Reserve  Board,  under  date  of  April  2,  1915  (Cir- 
cular No.  11),  went  still  further  and  said,  in  part: 

"It  is  believed  that  it  would  unduly  restrict  the  development 
of  the  acceptance  business   to  keep   it  altogether  confined   within 

—  53  — 


the  provisions  of  Section  13,  which  requires  that  acceptances,  in 
order  to  be  eligible  for  rediscount  at  a  Federal  reserve  bank,  must 
bear  the  indorsement  of  a  member  bank;  particularly  in  view  of 
the  further  fact  that  the  law  limits  the  amount  of  acceptances  which 
may  be  taken  with  the  indorsement  of  a  member  bank  to  50  per 
centum  of  its  paid-in  capital  and  surplus.  Having  found  it  neces- 
sary to  extend  the  scope  of  dealings  in  acceptances  beyond  these 
limits,  the  Board  has  exercised  the  authority  conferred  upon  it  by 
Section  14,  and  has  formulated  regulations  covering  the  purchase 
of  acceptances  without  invariably  requiring  the  indorsement  of  a 
member  bank. 

"The  acceptance  is  the  standard  form  of  paper  in  the  world 
discount  market,  and  both  on  this  account  and  because  of  its 
acknowledged  liquidity  universally  commands  a  preferential  rate. 
By  reason  of  its  being  readily  marketable,  it  is  widely  regarded  as 
a  most  desirable  paper  in  the  secondary  reserves  of  banks  and  will 
help  to  provide  an  effective  substitute  for  the  'call  loan.'  Its  growth, 
however,  will  depend  upon  the  ability  of  the  American  market  to 
adjust  its  rates  effectively  to  those  prevailing  in  other  markets 
for  paper  of  this  class. 

"Recognizing  these  facts,  the  Federal  Reserve  Board  has 
determined  to  allow  the  Federal  reserve  banks  latitude  in  fixing 
rates  for  acceptances :  Federal  reserve  banks  may,  from  time  to 
time,  submit  for  the  approval  of  the  Board  maximum  and  mini- 
mum rates  within  which  they  desire  to  be  authorized  to  deal  in 
acceptances;  within  such  limits  and  subject  to  such  modifications  as 
may  be  imposed  by  the  Board,  Federal  reserve  banks  will  be  allowed 
to  establish  the  rates  at  which  they  will  deal  in  acceptances. 

"The  Board  believes  it  to  be  in  accordance  with  the  spirit 
of  the  Act  to  accord  preferential  treatment  to  acceptances  bearing 
the  indorsement  of  member  banks,  offered  for  rediscount  under 
Section  13 — even  to  the  point  of  allowing  lower  rates  for  such 
acceptances,  inasmuch  as  under  the  terms  of  this  section,  such 
acceptances  are  available  as  collateral  against  the  issue  of  Federal 
reserve  notes;  and  the  Board  will  sanction  a  slight  preferential 
in  favor  of  acceptances  bearing  the  indorsement  of  member  banks. 

"When  acceptances  bearing  the  indorsement  of  member  banks 
are  not  obtainable  in  adequate  amount  or  upon  satisfactory  terms. 
Federal  reserve  banks  desiring  to  purchase  acceptances  should 
restrict  themselves  as  far  as  posisble  to  such  acceptances  as  bear 
some  other  responsible  signature  (other  than  that  of  the  drawer 
and  acceptor)  and  preferably  that  of  a  bank  or  banker." 


54- 


Regulations  on  Bankers'  Acceptances 

Regulation  J,  Series  of  1915 

bankers'  acceptances 

[Superseding  Regulation  D  of  1915] 

The  early  regulations  of  the  Federal  Reserve  Board  on  bankers' 
acceptances  follow: 


"In  this  regulation,  the  term  'acceptance'  is  defined  as  a  draft 
or  bill  of  exchange  drawn  to  order,  having  a  definite  maturity 
and  payable  in  dollars  in  the  United  States,  the  obligation  to  pay 
which  has  been  accepted  by  an  acknowledgment  written  or  stamped 
and  signed  across  the  face  of  the  instrument  by  the  party  on  whom 
it  is  drawn;  such  agreement  to  be  to  the  effect  that  the  acceptor 
will  pay  at  maturity  according  to  the  tenor  of  such  draft  or  bill 
without  qualifying  conditions. 

"The  Federal  Reserve  Board  has  determined  that,  until  further 
order,  to  be  eligible  for  discount  under  Section  13  by  Federal  re- 
serve banks   at   rates   to   be  established    for  bankers'   acceptances : 

"Acceptances  must  have  been  made  by  a  member  bank,  non- 
member  bank,  trust  company,  or  by  some  private  banking  firm, 
person,  company  or  corporation  engaged  in  the  business  of  accept- 
ing or  discounting.  Such  acceptances  will  hereafter  be  referred  to 
as  'bankers'  acceptances'; 

"A  banker's  acceptance  must  be  drawn  by  a  commercial,  in- 
dustrial or  agricultural  concern  (that  is,  some  person,  firm,  com- 
pany or  corporation)  directly  connected  with  the  importation 
exportation  of  the  goods  involved  in  the  transaction  in  which 
acceptance  originated,  or  by  a  'banker.'  In  the  latter  case 
goods,  the  importation  or  exportation  of  which  is  to  be  financed 
by  the  acceptance,  must  be  clearly  specified  in  the  agreement  with  or 
the  letter  of  advice  to  the  acceptor.  The  bill  must  not  be  drawn  or 
renewed  after  the  goods  have  been  surrendered  to  the  purchaser 
or  consignee. 

"A  banker's  acceptance  must  bear  on  its  face,  or  be  accom- 
panied by,  evidence  in  the  form  satisfactory  to  a  Federal  re-y^ 
serve  bank  that  it  originated  in  actual  bona  fide  sale  or  consign- 
ment involving  the  importation  or  exportation  of  goods. /Such  evi- 
dence may  consist  of  a  certificate  on  or  accompanying  the  accept- 
ance to  the  following  effect : 

'This  acceptance  is  based  upon  a  transaction  involving  the 
importation  or  exportation  of  goods.  Reference  No.  — .  Name 
of  Acceptor  .' 

—  55  — 


( 


i 

com- 
on  or. /* 
:h  they 
t,    thqA 


ng 

aty 


"Bankers'  acceptances,  other  than  those  of  member  banks, 
shall  be  eligible  only  after  the  acceptors  shall  have  agreed  in 
writing  to  furnish  to  the  Federal  reserve  banks  of  the  respective 
districts,  upon  request,  information  concerning  the  nature  of  the 
transactions  against  vi'hich  acceptances  have  been  made. 

"A  bill  of  exchange  accepted  by  a  'banker'  may  be  considered 
as  drawn  in  good  faith  against  'actually  existing  values,'  when  it  is 
secured  by  a  lien  on  or  by  transfer  of  title  to  the  goods  to  be 
transported;  or  in  case  of  release  of  the  goods  before  payment 
of  the  acceptance  by  the  substitution  of  other  adequate  security. 

"Except  in  so  far  as  they  may  be  secured  by  a  lien  on  or  by 
transfer  of  the  title  to  the  goods  to  be  transported,  the  bills  of 
any  person,  firm,  company,  or  corporation,  drawn  on  and  accepted 
by  any  private  banking  firm,  person,  or  corporation  (other  than 
a  bank  or  trust  company)  engaged  in  the  business  of  discounting 
or  accepting,  and  discounted  by  a  Federal  reserve  bank,  shall 
no  time  exceed  in  the  aggregate  a  sum  equal  to  five  per  centum 
the  paid-in  capital  of  such  Federal  reserve  bank. 

"The  aggregate   of   acceptances   of   any  private  banking  firm, 
person,  company,  or  corporation  (other  than  a  bank  or  trust  com- 
pany)   engaged   in   the   business   of   discounting  or   accepting,   dis- 
counted or  purchased  by  a  Federal  reserve  bank,  shall  at  no  time)/ 
exceed  a  sum  equal  to  twenty-five  per  centum  of  the  paid-in  capital  \ 
of  such  Federal  reserve  bank.     .     . 

"While  it  would  appear  impracticable  to  fix  a  maximum  sum 
or  percentage  up  to  which  Federal  reserve  banks  may  invest 
in  bankers'  acceptances,  both  under  Section  13  and  Section  14,  it 
will  be  necessary  to  watch  carefully  the  aggregate  amount  to  be 
held  from  time  to  time.  In  framing  their  policy  with  respect  to 
transactions  in  acceptances.  Federal  reserve  banks  will  have  to 
consider,  not  only  the  local  demands  to  be  expected  from  their 
own  members,  but  also  requirements  to  be  met  in  other  districts. 
The  plan  to  be  followed  must  in  each  case  adapt  itself  to  the  con- 
stantly varying  needs  of  the  country.    .    .    ." 


Final  Definition  of  Trade  Acceptance 

Regulation  P,  Series  of  1915 

BILLS  OF  EXCHANGE  DRAWN  AGAINST  SALES  OF  GOODS  AND  ACCEPTED  BY  PURCHASERS, 
HEREINAFTER   REFERRED    TO   AS    "TRADE   ACCEPTANCES" 

When  the  Federal  Reserve  Board,  on  July  15th,  promulgated 
Circular  No.  16  (Regulation  P),  Series  of  1915,  it  became  evident 


—  56  — 


that  the  regulation  issued  in  November,  1914,  previously  referred 
to,  was  really  to  prepare  the  way  for  the  final  definition  of  "Trade 
Acceptances."  Other  rulings  also  pointed  out  that  eventually 
double-name  paper  would  be  shown  preference.  This  was  finally 
demonstrated  when  the  Board  approved  a  rate  for  trade  accept- 
ances of  one-half  of  one  per  cent,  below  the  regular  discount  rate. 
The  significance  of  this  material  variation  in  the  rate  is  apparent, 
as  it  was  originally  proposed  to  fix  "a  slightly  lower  rate"  for  two- 
name  paper  than  for  single-name  notes. 


Regulation  P,  of  July  15,  1915,  is  as  follows: 

"In  this  regulation,  the  term  'trade  acceptance'  is  defined  as 
a  bill  of  exchange  of  the  character  hereinafter  described,  drawn 
to  order,  having  a  definite  maturity  and  payable  in  dollars  in  the 
United  States,  the  obligation  to  pay  which  has  been  accepted  by 
an  acknowledgment,  written  or  stamped,  and  signed,  across  the  face 
of  the  instrument,  by  the  company,  firm,  corporation,  or  person  upon 
whom  it  is  drawn;  such  agreement  to  be  to  the  efifect  that  the 
acceptor  will  pay  at  maturity,  according  to  its  tenor,  such  draft  or 
bill  without  qualifying  conditions. 

"A  trade  acceptance  to  be  eligible  for  rediscount,  under  Section 
13,  with  a  Federal  reserve  bank  at  the  rate  to  be  established  for 
trade  acceptances : 

(a)  Must  be  indorsed  by  a  member  bank,  accompanied  by 
waiver  of  demand  notice  and  protest. 

(b)  Must  have  a  maturity  at  the  time  of  discount  of  not  more 
than  90  days. 

(c)  Must  be  accepted  by  the  purchaser  of  goods  sold  to  him 
by  the  drawer  of  the  bill  and  the  bill  must  have  been  drawn  against 
indebtedness  expressly  incurred  by  the  acceptor  in  the  purchase 
of  such  goods. 

"A  trade  acceptance  must  bear  on  its  face,  or  be  accompanied 
by,  evidence  in  form  satisfactory  to  the  Federal  reserve  bank  that 
it  was  drawn  by  the  seller  of  the  goods  on  the  purchaser  of  such 
goods.  Such  evidence  may  consist  of  a  certificate  on  or  accom- 
panying the  acceptance,  to  the  following  effect:  'The  obligation  of 
the  acceptor  of  this  bill  arises  out  of  the  purchase  of  goods  from 
the  drawer.'  Such  certificate  may  be  accepted  by  the  Federal  re- 
serve bank  as  sufficient  evidence;  provided,  however,  that  the  Fed- 
eral reserve  bank,  in  its  discretion,  may  inquire  into  the  exact  nature 
of  the  transaction  underlying  the  acceptance." 

—  57  — 


Open-Market  Purchase  of  Bankers'   Acceptances 

Regulation  S,  Series  of  1915 
[Superseding  Regulation  R  of  1915] 

In  Regulation  R,  Series  of  1915,  relating  to  the  discount  of 
bankers'  acceptances,  the  Federal  Reserve  Board  provided  for  the 
purchase  in  the  open  market  of  bankers'  acceptances  based  on  the 
importation  or  exportation  of  goods.  The  Board  further  stated 
that  it  had  not  felt  justified,  when  admitting  State  banks  and  trust 
companies  into  the  Federal  Reserve  System,  in  stipulating  that 
such  domestic  acceptances  should  not  be  continued  under  reason- 
able limitations  as  a  part  of  their  business. 

Inasmuch  as  the  making  of  these  acceptances  has  been  recog- 
nized by  the  Board  as  the  exercise  of  a  legitimate  banking  func- 
tion when  authorized  by  law,  it  is  thought  that  they  are  of  the 
character  to  make  desirable  investments  for  Federal  reserve  banks. 
The  Board  therefore  issued  a  new  regulation  (Regulation  S,  Series 
of  1915),  not  only  embodying  the  authority  given  in  Regulation 
R,  Series  of  1915,  to  purchase  bankers'  acceptances  based  on  the 
importation  or  exportation  of  goods,  but  also  authorizing  the  pur- 
chase of  bankers'  domestic  acceptances  within  the  limits  prescribed 
in  the  regulation,  which  provides : 

"The  Federal  Reserve  Board  has  determined  that,  until  fur- 
ther notice,  to  be  eligible  for  purchase  under  Section  14  at  the 
rates  to  be  established  for  the  purchase  of  bankers'  domestic  and 
foreign  acceptances : 

"(a)  Acceptances  must  have  been  made  by  a  bank  or  trust 
company,  or  by  some  firm,  person,  company,  or  corporation  en- 
gaged in  the  business  of  accepting  or  discounting.  Such  accept- 
ances will  hereafter  be  referred  to  as  'bankers'  acceptances'; 

"(b)  A  banker's  foreign  acceptance  must  be  drawn  by  a  pur- 
chaser or  seller  or  other  person,  firm,  company,  or  corporation 
directly  connected  with  the  importation  or  exportation  of  the  goods 
involved  in  the  transaction  in  which  the  acceptance  originated,  or 
by  a  'banker.'  The  bill  must  not  be  renewed  after  the  goods  have 
been  surrendered  to  the  purchaser  or  consignee,  except  for  such 
reasonable  period  as  may  have  been  agreed  upon  at  the  time  of 
the  opening  of  the  credit  as  a  condition  incidental  to  the  importa- 
tion or  exportation  involved,  provided  that  the  bill  must  not  con- 
tain or  be  subject  to  any  condition  whereby  the  holder  thereof  is 
obligated  to  renew  the  same  at  maturity; 

—  58  — 


"(c)  A  banker's  foreign  acceptance  must  bear  on  its  face,  or 
be  accompanied  by,  evidence  in  form  satisfactory  to  a  Federal 
reserve  bank  that  it  originated  in,  or  is  based  upon,  a  transaction 
or  transactions  involving  the  importation  or  exportation  of  goods. 
Such  evidence  may  consist  of  a  certificate  on  or  accompanying  the 
acceptance  to  the  following  effect :  'This  acceptance  is  based  upon  a 
transaction  involving  the  importation  or  exportation  of  goods. 
Reference  No.  — .    Name  of  Acceptor ; 

"(d)  A  banker's  domestic  acceptance  must  be  based  on  a  trans- 
action covering  the  shipment  of  goods,  such  transactions  to  be  evi- 
denced at  the  time  of  acceptance  by  accompanying  shipping 
documents,  or  must  be  secured  by  a  warehouse  receipt  covering 
readily-marketable  staples  and  issued  by  a  warehouse  independent 
of  the  borrower;  or  by  the  pledge  of  goods  actually  sold; 

"(e)  A  banker's  domestic  acceptance  must  bear  on  its  face,  or 
be  accompanied  by,  evidence  in  form  satisfactory  to  the  Federal 
reserve  bank  that  it  is  based  on  a  transaction  or  is  secured  by  a 
receipt  or  pledge  of  the  character  defined  in  (d)  hereof.  Such 
evidence  may  consist  of  a  certificate  in  general  form  similar  to  that 
suggested  in  (c)  hereof; 

"(f)  Bankers'  acceptances,  other  than  those  of  member  banks, 
whether  foreign  or  domestic,  shall  be  eligible  only  after  the  accept- 
ors shall  have  agreed  in  writing  to  furnish  to  the  Federal  reserve 
banks  of  their  respective  districts,  upon  request,  information  con- 
cerning the  nature  of  the  transactions  against  which  acceptances 
(certified  or  bearing  evidence  under  (c)  and  (e)  hereof)  have  been 
made; 

"(g)  The  aggregate  of  bills,  domestic  and  foreign,  of  any 
one  drawer,  drawn  on  and  accepted  by  any  bank  or  trust  com- 
pany and  purchased  or  discounted  by  a  Federal  reserve  bank,  shall 
at  no  time  exceed  10  per  cent,  of  the  unimpaired  capital  and  surplus 
of  such  bank  or  trust  company,  but  this  restriction  shall  not  apply 
to  the  purchase  or  discount  of  bills  drawn  in  good  faith  against 
actually  existing  values ;  that  is,  bills  the  acceptor  of  which  is 
secured  by  a  lien  on  or  by  a  transfer  of  title  to  the  goods  to  be 
transported,  or  by  other  adequate  security,  such  as  a  warehouse 
receipt,  or  the  pledge  of  goods  actually  sold ; 

"(h)  The  aggregate  of  bills,  domestic  and  foreign,  of  any 
one  drawer,  drawn  on  and  accepted  by  any  firm,  person,  company, 
or  corporation  (other  than  a  bank  or  trust  company)  engaged  in 
the  business  of  discounting  or  accepting,  and  purchased  or  dis- 
counted by  a  Federal  reserve  bank,  shall  at  no  time  exceed  a  sum 
equal  to  a  definite  percentage  of  the  paid-in  capital  of  such  Federal 
reserve  bank,  such  percentage  to  be  fixed  from  time  to  time  by 
the  Federal  Reserve  Board ;  but  this  restriction  shall  not  apply  to 
the  purchase  or  discount  of  bills  drawn  in  good  faith  against  actually 

—  59  — 


existing  values;  that  is,  bills  the  acceptor  of  which  is  secured  by 
a  lien  on  or  by  a  transfer  of  title  to  the  goods  to  be  transported  or 
by  other  adequate  security,  such  as  a  warehouse  receipt,  or  the 
pledge  of  goods  actually  sold; 

"(i)  The  aggregate  of  bankers'  acceptances,  domestic  and  for- 
eign, made  by  any  one  firm,  person,  company,  or  corporation  (other 
than  a  bank  or  trust  company)  engaged  in  the  business  of  dis- 
counting or  accepting,  purchased  or  discounted  by  a  Federal  re- 
serve bank,  shall  at  no  time  exceed  a  sum  equal  to  a  definite  per- 
centage of  the  paid-in  capital  of  such  Federal  reserve  bank;  such 
percentage  to  be  fixed  from  time  to  time  by  the  Federal  Reserve 
Board. 

"No  Federal  reserve  bank  shall  purchase  a  domestic  or  foreign 
acceptance  of  a  'banker'  other  than  a  member  bank  which  does  not 
bear  the  indorsement  of  a  member  bank,  unless  there  is  furnished 
a  satisfactory  statement  of  the  financial  condition  of  the  acceptor 
in  form  to  be  approved  by  the  Federal  Reserve  Board. 

"Federal  reserve  banks  should  bear  in  mind  that  preference 
should  be  given  wherever  possible  to  acceptances  indorsed  by  a 
member  bank,  discounted  under  Section  13,  not  only  because  of  the 
additional  protection  that  such  indorsement  affords,  but  also  be- 
cause of  the  reason  that  acceptances  discounted  under  Section  13 
may  be  used  as  collateral  security  for  the  issue  of  Federal  reserve 
notes." 


Preferential  Rate  on  Acceptances 

From  the  foregoing,  it  will  be  noted  that  the  desire  of  the 
Federal  Reserve  Board  is  to  establish  a  class  of  paper  which  will, 
as  surely  as  possible,  bear  on  its  face  the  fact  that  it  is  used  in 
connection  with  a  genuine  commercial  transaction ;  that  the  pro- 
ceeds are  to  be  used  in  the  producing,  carrying  or  marketing  of 
goods,  in  one  or  more  steps  of  production  and  distribution,  and 
feeling  that  the  trade  acceptance  or  domestic  bill  of  exchange  is 
most  easily  identified  on  its  face  with  such  a  transaction,  permits 
a  preference  thereon  by  a  slightly  lower  rate  when  a  reserve  bank 
rediscounts  or  purchases  same  in  the  open  market. 

This  does  not  mean  that  any  doubt  should  be  cast  upon 
single-name  paper,  which  heretofore  has  occupied  the  discount 
market.  It,  too,  is  eligible  for  rediscount  by  the  Federal  reserve 
banks  if  accompanied  by  satisfactory  evidence  that  the  proceeds 

—  60  — 


were  used,  or  were  to  be  used,  as  specified,  for  strictly  commercial 
purposes.  Single-name  paper  does  not,  of  course,  on  its  face, 
move  parallel  to  or  along  with  commercial  transactions  as  the 
trade  acceptance  does,  yet  the  vast  bulk  of  single-name  paper  has 
always  fallen  under  the  definition  of  that  class  of  paper  eligible 
under  the  Federal  Reserve  Act  and  rulings  established  by  the 
Federal  Reserve  Board. 


Checking  Tendency  Toward  Over-Expansion 

Each  piece  of  paper,  whether  it  be  single  or  double-name, 
must  be  examined  to  discover  its  peculiar  merits.  The  mere  fact 
that  the  paper  contains  two  names  does  not,  of  course,  alone  make 
it  preferable  to  a  single-name  note,  but  from  the  point  of  view  of 
the  Federal  Reserve  Board,  does  have  an  advantage  in  its  almost 
self-evident  relationship  with  that  form  of  commercial  transaction 
defined  in  the  Act. 

It  is  also  quite  apparent  that  the  Federal  Reserve  Board  will 
not  countenance  any  laxity  on  the  part  of  the  Federal  reserve 
banks  in  rediscounting  or  buying  acceptances  in  the  open  market. 
Proper  evidence  of  the  responsibility  of  the  acceptor  will  always 
be  necessary  when  the  paper  is  bought  in  the  open  market,  and 
if  discounted  in  behalf  of  a  member  bank,  will  be  subjected  to  the 
same  sort  of  examination  as  single-name  paper.  This,  in  itself,  is 
likely  to  prove  an  effective  check  on  any  efforts  toward  over- 
expansion  on  the  part  of  the  drawers  of  acceptances  or  notes.  It 
is  a  matter  of  credit  in  each  case. 


Cable  Transfers  and  Bills  of  Exchange 

Regulation  T,  Series  of  1915 

GENERAL    OPEN-MARKET    OPERATIONS 

The  purchase  and  sale  of  cable  transfers  and  bills  of  exchange, 
both  domestic  and  foreign,  of  the  kinds  and  maturities  made  eligi- 
ble for  rediscount  by  the  Federal  Reserve  Act,  and  of  bankers' 
acceptances  payable  in  foreign  countries  and  in  foreign  currencies, 
are  covered  by  Circular  No.  20  and  Regulation  T,  December  4, 

—  61  — 


1915,  in  which  the  Board  calls  attention  to  the  open-market  sec- 
tion of  the  Federal  Reserve  Act,  and  to  the  fact  that  it  enables  the 
Federal  reserve  banks  to  exert  a  steadying-  influence  upon  pre- 
vailing rates  of  interest  by  the  use  of  their  purchasing  power  when- 
ever conditions  make  such  influence  desirable,  and  when,  owing 
to  the  lack  of  applications  for  rediscounts,  they  are  unable  to  in- 
fluence rates  through  the  latter  means.  The  Board  states,  how- 
ever, that  it  does  not  wish  to  be  understood  as  encouraging  ex- 
pansion of  credits  at  times  and  under  conditions  when  there  should 
be  contraction,  but  rather  as  holding  the  view  that  the  Federal 
reserve  banks,  taking  cognizance  of  the  conditions  in  their  respec- 
tive districts,  should  avail  themselves  of  the  powers  granted  by 
the  Act,  just  as  they  have  done  in  connection  with  other  open- 
market  powers  conferred  upon  them. 

The  Board  defines  "open-market  operations"  as  all  those 
transactions  authorized  by  Section  14  of  the  Federal  Reserve  Act 
which  involve  dealings  with  persons  or  institutions — whether  or 
not  members  of  the  Federal  Reserve  System — and  which  do  not 
require  the  indorsement  of  a  member  bank.  The  regulation  makes 
the  provision: 

"In  order  to  carry  on  open-market  transactions  in  cable 
transfers  and  foreign  bills  of  exchange  (including  foreign  bankers' 
acceptances)  ;  that  is,  payments  to  be  made  in,  or  bills  payable  in 
foreign  countries,  it  will  be  necessary  for  Federal  reserve  banks  to 
open  accounts  or  establish  agencies  in  foreign  countries.  Such  bills 
of  exchange  and  foreign  acceptances  must  comply  with  the  applicable 
requirements  of  Sections  13  and  14.  As  the  law  prescribes  that 
these  connections  are  to  be  established  only  with  the  consent  of  the 
Federal  Reserve  Board,  Federal  reserve  banks  will  be  required  to 
communicate  with  the  Federal  Reserve  Board  whenever  they  are 
ready  to  enter  these  foreign  fields. 

"The  Federal  Reserve  Board  realizes  that  in  dealing  in  foreign 
exchange  the  Federal  reserve  banks  must  necessarily  have  wide  dis- 
cretion in  determining  the  rates  at  which  they  will  buy  or  sell. 
It  is  not  necessary  that  the  bills  shall  have  been  actually  accepted 
at  the  time  of  purchase.  The  Federal  Reserve  Board,  however, 
will  require  that  unaccepted  'long  bills'  payable  in  foreign  countries, 
when  purchased,  unless  secured  by  documents,  shall  bear  one  satis- 
factory indorsement  other  than  those  of  the  drawer  or  acceptor, 
preferably  that  of  a  banker.  Federal  reserve  banks  should  exercise 
due  caution  in  dealing  in  foreign  bills,  and  boards  of  directors 
should  fix  a  limit  within  which  the  acceptances  or  bills  of  a  single 
firm  may  be  taken. 

—  62  — 


"A  bill  of  exchange  may  be  defined  as  an  unconditional  order 
in  writing,  addressed  by  one  person  to  another,  signed  by  the 
person  giving  it,  requiring  the  person  to  whom  it  is  addressed  to 
pay  on  demand,  or  at  a  fixed  or  determinable  future  time,  a  certain 
sum  of  money  to,  or  to  the  order  of,  a  specified  person,  or  to 
bearer. 

"A  domestic  bill  of  exchange  is  payable  in  dollars  in  the  United 
States. 

"The  Federal  Reserve  Board  has  determined  that  a  bill,  in 
order  to  be  eligible  for  purchase  under  Section  14  by  a  Federal 
reserve  bank,  at  the  rate  to  be  established  for  open-market 
operations : 

"(a)  Must  be  a  bill,  the  proceeds  of  which  have  been  used, 
or  are  to  be  used,  in  producing,  purchasing,  carrying,  or  marketing 
goods  in  one  or  more  steps  of  production,  manufacture  and  dis- 
tribution; but  shall  not  be  eligible  if  its  proceeds  have  been  used, 
or  are  to  be  used,  for  a  permanent  or  fixed  investment  of  any  kind ; 
for  example,  land,  buildings,  machinery,  etc.,  or  for  any  investment 
of  a  merely  speculative  character; 

"(b)  Must  have  been  drawn  by  a  domestic  or  foreign  firm, 
company,  corporation,  or  individual  in  the  United  States;  but  need 
not  bear  the  indorsement  of  a  member  bank; 

"(c)  Must  have  been  accepted  by  the  drawee  prior  to  the 
purchase  by  a  Federal  reserve  bank,  unless  accompanied  and  secured 
by  approved  warehouse  receipts,  bills  of  lading,  or  other  such  docu- 
ments  covering   readily-marketable   goods. 

"Before  purchasing  domestic  bills  of  exchange  (a)  the  Federal 
reserve  bank  must  secure  statements  concerning  the  condition 
and  standing  of  the  drawer  of  the  paper,  and,  if  possible,  also  of 
the  acceptor  of  the  bill,  sufficient  to  satisfy  the  bank  as  to  the 
nature  and  quality  of  the  paper  to  be  purchased. 

"(b)  No  Federal  reserve  bank  will  be  permitted  to  purchase 
bills  of  any  one  drawer,  or  issued  upon  one  maker  to  an  amount 
to  exceed  in  the  aggregate  a  percentage  of  its  capital,  to  be  fixed 
from  time  to  time  by  the  Federal  Reserve  Board,  except  when 
secured  by  approved  warehouse  receipts,  bills  of  lading,  or  other 
such  documents  covering  readily-marketable  goods.  The  aggregate 
amount  drawn  on  any  one  acceptor,  purchased  by  Federal  reserve 
banks,  shall  not  exceed  a  reasonable  percentage  of  the  stated  net 
worth  of  the  parties  whose  names  appear  upon  the  paper. 

"Federal  reserve  banks  desiring  to  engage  in  open-market  trans- 
actions in  domestic  bills  of  exchange  are  required  to  communicate 
to  the  Federal  Reserve  Board  the  rate  they  desire  to  establish, 
for  review  and  determination." 

—  63  — 


Regulation  B,  Series  of  1916  (in  which  no  change  appears  in 
Regulation  B  of  1917),  supersedes  the  foregoing  and  makes  more 
explicit  the  definitions  and  rules  for  the  open-market  purchase  of 
bills  of  exchange,  trade  acceptances,  and  bankers'  acceptances 
under  Section  14  of  the  Federal  Reserve  Act,  as  follows : 

Character  of  Bills  and  Acceptances  Eligible 

Regulation  B,  Series  of  1916 

OPEN-MARKET     PURCHASES     OF     BILLS     OF     EXCHANGE,     TRADE     ACCEPTANCES,     AND 
bankers'  ACCEPTANCES  UNDER  SECTION   14 

[Superseding  Regulations  S  and  T  of  1915] 

"The  Federal  Reserve  Board,  exercising  its  statutory  right 
to  regulate  the  purchase  of  bills  of  exchange  and  acceptances,  has 
determined  that  a  bill  of  exchange  or  acceptance,  to  be  eligible 
for  purchase  by  Federal  reserve  banks  under  Section  14 — 

"(a)  Must  not  have  been  issued  for  carrying  or  trading  ih 
stocks,  bonds,  or  other  investment  securities,  except  bonds  and 
notes  of  the  Government  of  the  United  States; 

"(b)  Must  not  be  a  bill  the  proceeds  of  v^rhich  have  been  used 
or  are  to  be  used  for  permanent  or  fixed  investments  of  any  kind, 
such  as  land,  buildings,  or  machinery,  or  for  investments  of  a 
merely  speculative  character; 

"(c)  Must  have  been  accepted  by  the  drawee  prior  to  pur- 
chase by  a  Federal  reserve  bank,  unless  it  is  accompanied  and 
secured  by  shipping  documents  or  by  a  warehouse,  terminal,  or  other 
similar  receipt  conveying  security  title; 

"(d)  May  be  secured  by  the  pledge  of  goods*  or  collateral, 
provided  it  is  otherwise  eligible." 

Bills  of  Exchange  and  Trade  Acceptances 

Regulation  B,  Series  of  1916 

OPEN-MARKET     PURCHASES     OF     BILLS     OF     EXCHANGE,     TRADE     ACCEPTANCES,     AND 
bankers'   ACCEPTANCES    UNDER    SECTION    14 

[Superseding  Regulations  S  and  T  of  1915] 

"(a)  DEFINITION.— A  bill  of  exchange,  within  the  meaning 

of  this  regulation,  is  defined  as  an  unconditional  order  in  writing 

addressed  by  one  person  to  another,  other  than  a  banker,  signed 

by  the  person  giving  it,  requiring  the  person  to  whom  it  is  ad- 

•  When  used  in  this  regulation,  the  word  "goods"  shall  be  construed 
to  include  goods,  wares,  merchandise,  or  agricultural  products.  Including 
liva   stock. 

—  64  — 


dressed,  to  pay,  in  the  United  States,  at  a  fixed  or  determinable 
future  time,  a  sum  certain  in  dollars  to  the  order  of  a  specified 
person;  and  a  trade  acceptance  is  defined  as  a  bill  of  exchange 
drawn  by  the  seller  on  the  purchaser  of  goods  sold,  and  accepted 
by  such  purchaser. 

"(b)  ELIGIBILITY.— To  be  eligible  for  purchase,  the  bill 
must  have  arisen  out  of  an  actual  commercial  transaction,  domestic 
or  foreign;  that  is,  it  must  be  a  bill  which  has  been  issued  or 
drawn  for  agricultural,  industrial,  or  commercial  purposes  or  the 
proceeds  of  which  have  been  used  or  are  to  be  used  for  the  purpose 
of  producing,  purchasing,  carrying  or  marketing  goods  in  one  or 
more  of  the  steps  of  the  process  of  production,  manufacture,  or 
distribution.  It  must  have  a  maturity  at  time  of  purchase  of  not 
more  than  ninety  days,  exclusive  of  days  of  grace. 

"(c)  EVIDENCE  OF  ELIGIBILITY.— A  Federal  reserve 
bank  shall  take  such  steps  as  it  deems  necessary  to  satisfy  itself 
as  to  the  eligibility  of  the  bill  offered  for  purchase,  unless  it 
presents  prima  facie  evidence  thereof  or  bears  a  stamp  or  certificate 
affixed  by  the  acceptor  or  drawer  showing  that  it  is  a  trade 
acceptance. 

"(d)  STATEMENTS.— Unless  indorsed  by  a  member  bank, 
a  bill  is  not  eligible  for  purchase  until  a  satisfactory  statement  has 
been  furnished  of  the  financial  condition  of  one  or  more  of  the 
parties  thereto." 


Bankers*  Acceptances 

Regulation  B,  Series  of  1916 

OPF.N-MARKET     PURCHASES      OF      BILLS      OF      EXCHANGE,     TRADE      ACCEPTANCES,      AND 
bankers'    ACCEPTANCES    UNDER    SECTION    14 

[Superseding  Regulations  S  and  T  of  1915] 

"(a)  DEFINITION.— A  banker's  acceptance,  within  the  mean- 
ing of  this  regulation,  is  a  bill  of  exchange  of  which  the  acceptor 
is  a  bank  or  trust  company,  or  a  firm,  person,  company,  or  corpora- 
tion engaged  in  the  business  of  granting  bankers'  acceptance  credits. 
"(b)  EUGIBILITY.— To   be    eligible    for    purchase,    the   bill, 
which  must  have  a  maturity  at  time  of  purchase  O'f  not  more  than 
three  months,  exclusive  of  days  of  grace,  must  have  been  drawn 
under  a  credit  opened   for  the  purpose  of  conducting,  or  settling 
accounts   resulting   from  a   transaction   or  transactions  involving — 
"(1)  The   shipment  of  goods  between  the  United    States  and 
any   foreign  country,  or  between  the  United   States  and 
any  of  its  dependencies  or  insular  possessions,  or  between 
foreign  countries,  or 


—  65  — 


"(2)  The  shipment  of  goods  within  the  United  States,  provided 
the  bill  at  the  time  of  its  acceptance  is  accompanied  by 
shipping  documents,  or 

"(3)  The  storage  within  the  United  States  of  readily-market- 
able goods,  provided  the  acceptor  of  the  bill  is  secured 
by  a   warehouse,   terminal,   or  other   similar    receipt,   or 

"(4)  The  storage  within  the  United  States  of  goods  which 
have  been  actually  sold,  provided  the  acceptor  of  the  bill  is 
secured  by  the  pledge  of  such  goods; 

or  it  must  be  a  bill  drawn  by  a  bank  or  banker  in  a  foreigfn 
country  or  dependency  or  insular  possession  of  the  United  States 
for  the  purpose  of  furnishing  dollar  exchange.  In  this  latter  case, 
the  baiik  or  banker  drawing  the  bill  must  be  in  a  country,  depend- 
ency, or  possession  whose  usages  of  trade  have  been  determined 
by  the  Federal  Reserve  Board  to  require  the  drawing  of  bills  of 
this  character. 

"(c)  EVIDENCE  OF  ELIGIBILITY.— A  Federal  reserve 
bank  must  be  satisfied  either  by  reference  to  the  acceptance  itself, 
or  otherwise,  that  it  is  eligible  for  purchase.  Satisfactory  evidence 
of  eligibility  may  consist  of  a  stamp  or  certificate  affixed  by  the 
acceptor,  in  form  satisfactory  to  the  Federal  reserve  bank.  No 
evidence  of  eligibility  is  required  with  respect  to  a  bill  accepted 
by  a  national  bank. 

"(d)  STATEMENTS.— Bankers'  acceptances,  other  than  those 
accepted  or  indorsed  by  member  banks,  shall  be  eligible  for  pur- 
chase only  after  the  acceptor  has  furnished  a  satisfactory  statement 
of  financial  condition  in  form  to  be  approved  by  the  Federal  Re- 
serve Board  and  has  agreed  in  writing  with  a  Federal  reserve 
bank  to  inform  it  upon  request  concerning  the  transactions  under- 
lying such  acceptances." 

The  foregoing  regulations  for  the  open-market  purchase  ot 
bills  of  exchange,  trade  acceptances,  and  bankers'  acceptances  under 
Section  14  are,  in  turn,  superseded  by  Regulation  B,  Series  of  1920, 
as  follows: 


Kinds  of  Bills  and  Acceptances  Specified 

Regulation  B,  Series  of  1920 

open-market    purchases    of    bills    of    exchange,    trade    .acceptances, 
bankers'  acceptances  under  section  14 

[Superseding  Regulation  B  of  1917] 

"The  Federal  Reserve  Board,  exercising  its  statutory  right 
to  regulate  the  purchase  of  bills  of  exchange  and  acceptances, 


—  66  — 


has    determined    that    a   bill    of    exchange    or    acceptance    to    be 
eligible  for  purchase  by  Federal  reserve  banks  under  Section  14: 

"(a)  I^rust  conform  to  the  relative  requirements  of  Regula- 
tion A,  except  that  a  banker's  acceptance  growing  out  of  a 
transaction  involving  the  storage  within  the  United  States  of 
goods  which  have  been  actually  sold,  may  be  purchased,  provided 
that  the  acceptor  is  secured  by  the  pledge  of  such  goods  and, 
provided  further,  that  the  bill  conforms  in  other  respects  to  the 
relative  requirements  of  Regulation  A    (see  page  69)  ; 

"(b)  Must  have  a  maturity  at  the  time  of  purchase  of  not 
more  than  90  days,  exclusive  of  days  of  grace,  unless  it  is  a  bill 
drawn  on  a  banker,  when  it  may  have  a  maturity  of  three 
months,  exclusive  of  days  of  grace; 

"(c)  Must  have  been  accepted  by  the  drawee  prior  to  pur- 
chase by  a  Federal  reserve  bank,  unless  it  is  either  accompanied 
and  secured  by  shipping  documents  or  by  a  warehouse,  terminal, 
or  other  similar  receipt  conveying  security  title,  or  bears  a  satisfac- 
tory banking  indorsement. 

"A  bill  of  exchange,  unless  indorsed  by  a  member  bank,  is 
not  eligible  for  purchase  until  a  satisfactory  statement  has  been 
furnished  of  the  financial  condition  of  one  or  more  of  the  parties 
thereto. 

"A  banker's  acceptance,  unless  accepted  or  indorsed  by  a 
member  bank,  is  not  eligible  for  purchase  until  the  acceptor  has 
furnished  a  satisfactory  statement  of  its  financial  condition  in 
form  to  be  approved  by  the  Federal  reserve  bank,  and  has  agreed 
in  writing  with  a  Federal  reserve  bank  to  inform  it  upon  request 
concerning  the  transaction   underlying  the  acceptance." 


Maturity  of  Bankers'  Acceptances  Extended 

The  Federal  Reserve  Board,  under  date  of  May  6,  1921,  issued 
a  new  Regulation  B,  Series  of  1921,  relating  to  open-market  pur- 
chases of  bills  of  exchange,  trade  acceptances  and  bankers'  accept- 
ances under  Section  14  of  the  Federal  Reserve  Act.  The  new  regula- 
tion, which  supersedes  Regulation  B,  Series  of  1920,  given  above, 
was  issued  primarily  for  the  purpose  of  permitting  Federal  reserve 
banks,  until  further  notice,  to  make  open-market  purchases  of 
bankers'  acceptances  having  maturities  not  exceeding  six  months, 
which  arise  out  of  transactions  involving  the  importation  or  exporta- 

—  67  — 


tion  of  goods.  Up  to  the  time  that  this  new  regulation  became  effective, 
three  months  was  the  maximum  maturity  of  acceptances  ehgible  for 
purcliase  by  Federal  reserve  banks. 

In  issuing  the  new  regulation,  the  Federal  Reserve  Board  stated 
that  two  considerations  had  prompted  it  to  take  such  action  :  ( 1 )  The 
desire  to  broaden  the  acceptance  market  by  meeting  the  wants  of  savings 
banks  and  other  purchasers  of  bankers'  acceptances  who  have  been 
deterred  from  investing  in  acceptances  of  more  than  three  months' 
maturity,  because  of  the  lack  of  authority  of  Federal  reserve  banks 
to  purchase  longer  maturities  up  to  six  months ;  (2)  to  provide  more 
ample  facilities  for  financing  import  and  export  trade  with  countries 
where  either  normal  conditions  or  present  abnormal  conditions  indicate 
the  desirability  of  rendering  assistance  by  making  acceptances  of 
maturities  not  exceeding  six  months  eligible  for  purchase  by  Federal 
reserve  banks.  The  Federal  Reserve  Board  points  out  that  vigilant 
care  should  be  exercised  by  Federal  reserve  banks  in  purchasing 
acceptances  of  long  maturities,  in  order  that  liquidity  of  the  aggre- 
gate investment  in  acceptances  held  by  them  should  not  be  affected. 

A  further  slight  amendment  to  Regulation  B  provides  for  the 
open-market  purchase  of  bankers'  acceptances  growing  out  of  the 
domestic  storage  of  goods  other  than  readily-marketable  staples. 

Regulation  B,  as  amended,  is  as  follows : 

Character  of  Bills  and  Acceptances  Eligible 

Regulation  B,  Series  of  1921 

OPEN-MARKET      PURCHASES      OF      BILLS      OF      EXCHANGE,     TRADE      ACCEPTANCES,      AND 
bankers'   ACCEPTANCES   UNDER   SECTION    14 

[Superseding  Regulation  B  of  1920] 
"The  Federal  Reserve  Board,  exercising  its  statutory  right  to 
regulate  the  purchase  of  bills  of  exchange  and  acceptances,  has 
determined  that  a  bill  of  exchange  or  acceptance,  to  be  eligible  for 
purchase  by  Federal  reserve  banks  under  this  provision  of  Section 
14,  must  have  been  accepted  by  the  drawee  prior  to  such  purchase, 
unless  it  is  either  accompanied  or  secured  by  shipping  documents 
or  by  warehouse,  terminal,  or  other  similar  receipt  conveying  secur- 

—  68  — 


j'ty  title,  or  bears  a  satisfactory  banking  indorsement,  and  must  con- 
form to  the  relative  requirements  of  Regulation  A  (see  page  71  of 
booklet),  except  that 

"(a)  A  bankers'  acceptance  growing  out  of  a  transaction 
involving  the  importation  or  exportation  of  goods  may  be  purchased 
if  it  has  a  maturity  not  in  excess  of  six  months,  exclusive  of  days 
of  grace,  provided  that  it  conforms  in  other  respects  to  the  relative 
requirements  of  Regulation  A,  and 

"(b)  A  bankers'  acceptance  growing  out  of  a  transaction 
involving  the  storage  within  the  United  States  of  goods  actually 
under  contract  for  sale  and  not  yet  delivered  or  paid  for  may  be 
purchased,  provided  that  the  acceptor  is  secured  by  the  pledge  of 
such  goods;  and  provided  further  that  the  acceptance  conforms  in 
other  respects  to  the  relative  requirements  of  Regulation  A. 

"A  bill  of  exchange,  unless  indorsed  by  a  member  bank,  is  not 
eligible  for  purchase  until  a  satisfactory  statement  has  been 
furnished  of  the  financial  condition  of  one  or  more  of  the  parties 
thereto. 

"A  bankers'  acceptance,  unless  accepted  or  indorsed  by  a  mem- 
ber bank,  is  not  eligible  for  purchase  until  the  acceptor  has  furnished 
a  satisfactory  statement  of  its  financial  condition  in  form  to  be 
approved  by  the  Federal  reserve  bank  and  has  agreed  in  writing 
with  a  Federal  reserve  bank  to  inform  it  upon  request  concerning 
the  transaction  underlying  the  acceptance." 


Statutory  Provisions  Governing  Rediscounts 

Regulation  A,  referred  to  in  Regulation  B,  Series  of  1921.  given 
above,  defines  the  general  character  of  the  notes,  drafts,  and  bills 
of  exchange  eligible  for  rediscount  under  Section  13  of  the  Federal 
Reserve  Act,  and  specifies  the  rules  and  conditions  governing  such 
operations. 

The  general  statutory  provisions  covering  rediscounts  under 
Section  13  stipulate  that  a  note,  draft,  or  bill  of  exchange  shall 
have  a  maturity  at  the  time  of  discount  of  not  more  than  90  days, 
exclusive  of  days  of  grace.  If  drawn  or  issued  for  agricultural 
purposes  or  based  on  live  stock,  however,  it  may  have  a  maturity 
of  not  more  than  six  months,  exclusive  of  days  of  grace.    The  note, 

—  69  — 


draft,  or  bill  must  be  indorsed  by  a  member  bank,  and  must  arise 
out  of  an  actual  commercial  transaction.  It  must  not  be  issued  for 
carrying  or  trading  in  stocks  or  other  investment  securities,  except 
bonds  and  notes  of  the  Government  of  the  United  States. 

The  aggregate  of  notes,  drafts,  and  bills  bearing  the  signature 
or  indorsement  of  any  one  borrower  rediscounted  for  any  one  mem- 
ber bank,  whether  State  or  national,  shall  at  no  time  exceed  10 
per  cent,  of  the  unimpaired  capital  and  surplus  of  such  bank;  but 
this  restriction  shall  not  apply  to  the  discount  of  bills  of  exchange 
drawn  in  good  faith  against  actually  existing  values.  As  previously 
shown,  the  amendment  to  the  Federal  Reserve  Act  of  March  3, 
1919,  authorized  the  Federal  Reserve  Board  to  permit  Federal  re- 
serve banks,  until  December  31,  1920,  to  rediscount  for  any  member 
bank  paper  bearing  the  signature  or  indorsement  of  any  one  bor- 
rower in  an  amount  not  to  exceed  20  per  cent,  of  the  member 
bank's  capital  and  surplus,  provided  that  the  excess  over  and  above 
10  per  cent,  was  secured  by  not  less  than  a  like  face  amount  of 
bonds  or  notes  of  the  United  States  issued  since  April  24,  1917, 
or  certificates  of  indebtedness  of  the  United  States. 

No  Federal  reserve  bank  may  discount  for  any  member  State 
bank  or  trust  company  any  of  the  notes,  drafts,  or  bills  of  any  one 
borrower  who  is  liable  for  borrowed  money  to  such  State  bank 
or  trust  company  in  an  amount  greater  than  10  per  cent,  of  the 
capital  and  surplus  of  that  State  bank  or  trust  company;  but  in 
determining  the  amount  of  money  so  borrowed,  the  discount  of 
bills  of  exchange  drawn  in  good  faith  against  actually  existing 
value,  and  the  discount  of  commercial  or  business  paper  actually 
owned  by  the  person  negotiating  the  same,  shall  not  be  included. 
The  amendment  of  March  3,  1919,  also  permitted  Federal  reserve 
banks,  with  the  consent  of  the  Federal  Reserve  Board,  to  redis- 
count for  a  member  State  bank  or  trust  company,  until  December 
31,  1920,  paper  of  any  one  borrower  secured  by  not  less  than  a 
like  face  amount  of  bonds  or  notes  of  the  United  States  issued 
since  April  24,  1917,  or  certificates  of  indebtedness  of  the  United 
States,  even  though  such  State  bank  or  trust  company  may  already 
have  loaned  to  the  borrower  under  his  regular  line  of  credit  in 
excess  of  the  10  per  cent,  limit  defined  above.  If,  however,  the 
member  State  bank  or  trust  company  had  loaned  to  one  borrower 
in  excess  of  the  10  per  cent,  limit  under  his  regular  line  of  credit, 
the  Federal  reserve  bank  could  not  rediscount  for  that  State  bank 

—  70  — 


or  trust  company  any  of  the  paper  of  that  borrower  taken  under 
that  regular  line  of  credit,  but  was  permitted  to  rediscount  any 
paper  so  secured  by  government  obligations  of  the  kinds  specified 
up  to  an  amount  not  in  excess  of  20  per  cent,  of  the  capital  and 
surplus  of  such  State  bank  or  trust  company. 

The  new  regulations  governing  rediscounts  under  Section  13 
are  as  follows : 


Notes,  Drafts,  and  Bills  of  Exchange  Eligible 

Regulation  A,  Series  of  1920 

REDISCOUNTS   UNDER   SECTION    13 

[Superseding  Regulation  A  of  1917] 

"The  Federal  Reserve  Board,  exercising  its  statutory  right 
to  define  the  character  of  a  note,  draft,  or  bill  of  exchange 
eligible  for  rediscount  at  a  Federal  reserve  bank,  has  deter- 
mined that: 

"(a)  It  must  be  a  note,  draft,  or  bill  of  exchange  which  has 
been  issued  or  drawn,  or  the  proceeds  of  which  have  been  used 
or  are  to  be  used  in  the  first  instance,  in  producing,  purchasing, 
carrying,  or  marketing  goods*  in  one  or  more  of  the  steps  of  the 
process  of  production,  manufacture,  or  distribution,  or  for  the 
purpose  of  carrying  or  trading  in  bonds  or  notes  of  the  United 
States ; 

"(b)  It  must  not  be  a  note,  draft,  or  bill  of  exchange  the 
proceeds  of  which  have  been  used  or  are  to  be  used  for  perma- 
nent or  fixed  investments  of  any  kind,  such  as  land,  buildings, 
or  machinery,  or  for  any  other  capital  purpose; 

"(c)  It  must  not  be  a  note,  draft,  or  bill  of  exchange  the 
proceeds  of  which  have  been  used  or  are  to  be  used  for  invest- 
ments of  a  purely  speculative  character  or  for  the  purpose  of 
lending  to   some  other  borrower; 

"(d)  It  may  be  secured  by  the  pledge  of  goods  or  collateral 
of  any  nature,  including  paper,  which  is  ineligible  for  rediscount, 
provided  it  (the  note,  draft,  or  bill  of  exchange)  is  otherwise 
eligible." 

Applications  for  Rediscount 

Regulation  A,  Series  of  1920 

REDISCOUNTS   UNDER   SECTION    13 

[Superseding  Regulation  A  of  1917] 

"All  applications  for  the  rediscount  of  notes,  drafts,  or  bills 
of  exchange  must  contain  a  certificate  of  the  member  bank,  in 

•  When  used  In  this  regulation,  the  word  "goods"  shall  be  construed 
lo   Include   goods,    wares,    merchandise,    or  agricultural   products.    Including 


—  71  — 


form  to  be  prescribed  by  the  Federal  reserve  bank,  that,  to  the 
best  of  its  knowledge  and  belief,  such  notes,  drafts,  or  bills  of 
exchange  have  been  issued  for  one  or  more  of  the  purposes 
mentioned  in  (a),  (see  page  69),  and,  in  the  case  of  a  member 
State  bank  or  trust  company,  all  applications  must  contain  a 
certificate  or  guaranty  to  the  eflfect  that  the  borrower  is  not 
liable,  and  will  not  be  permitted  to  become  liable  during  the 
time  his  paper  is  held  by  the  Federal  reserve  bank,  to  such  bank 
or  trust  company  for  borrowed  money  in  an  amount  greater  than 
that  specified  in  I  abovef." 


Promissory  Notes 

Regulation  A,  Series  of  1920 

REDISCOUNTS   UNDER   SECTION    13 

[Superseding  Regulation  A  of  1917] 

"(a)  DEFINITION.— A  promissory  note,  within  the 
meaning  of  this  regulation,  is  defined  as  an  unconditional 
promise,  in  writing,  signed  by  the  maker,  to  pay,  in  the  United 
States,  at  a  fixed  or  determinable  future  time,  a  sum  certain  in 
dollars  to  order  or  to  bearer. 

"(b)  EVIDENCE  OF  ELIGIBILITY  AND  REQUIRE- 
MENT OF  STATEMENTS.— A  Federal  reserve  bank  must  be 
satisfied  by  reference  to  the  note  or  otherwise  that  it  is  eligible 
for  rediscount.  The  member  bank  shall  certify  in  its  application 
whether  the  note  oflFered  for  rediscount  has  been  discounted  for  a 
depositor  other  than  a  bank  or  for  a  non-depositor  and,  if  dis- 
counted for  a  banl<,  whether  for  a  member  or  a  non-member 
bank.  The  member  bank  must  also  certify  whether  a  financial 
statement  of  the  borrower  is  on  file  with  it. 

"A  recent  financial  statement  of  the  borrower  must  be  on 
file  with  the  member  bank  in  all  cases,  except  with  respect  to 
any  note  discounted  by  a  member  bank  for  a  depositor  other 

than  a  bank  or  another  member  bank  if 

"(1)  It  is  secured  by  a  warehouse,  terminal,  or  other 
similar  receipt  covering  goods  in  storage,  or  by  bonds  or 
notes  of  the  United  States;  or 

"(2)  The  aggregate  of  obligations  of  the  borrower 
rediscounted  and  offered  for  rediscount  at  the  Federal  re- 
serve bank  by  the  member  bank  is  less  than  a  sum  equal 
to  10  per  cent,  of  the  paid-in  capital  of  the  member  bank 
and  is  less  than  $5,000. 
"The  Federal  reserve  bank  shall  use  its  discretion  in  taking 
the  steps  necessary  to  satisfy  itself  as  to  eligibility.     Compliance 


t  Refers    to    General    Statutory    Provisions     of     Section     13,     previously 
autnmarlzed. 


—  72  — 


of  a  note  with  II  (b)  t  may  be  evidenced  by  a  statement  of  the 
borrower  showing  a  reasonable  excess  of  quick  assets  over  cur- 
rent habilities.  A  Federal  reserve  bank  may,  in  all  cases,  require 
the  financial  statement  of  the  borrower  to  be  filed  with  it." 

The  general  statutory  provisions  relating  to  rediscounts  under 
Section  13  specify  that  any  Federal  reserve  bank  may  make  ad- 
vances to  its  member  banks  on  their  promissory  notes  for  a  period 
not  exceeding  15  days,  provided  that  they  are  secured  by  notes, 
drafts,  bills  of  exchange,  or  bankers'  acceptances  which  are  eligible 
for  rediscount  or  for  purchase  by  Federal  reserve  banks,  or  by  the 
deposit  or  pledge  of  bonds  or  notes  of  the  United  States,  or  bonds 
of  the  War  Finance  Corporation. 

Drafts,  Bills  of  Exchange,  and  Trade  Acceptances 

Regulation  A,  Series  of  1920 

REDISCOUNTS  UNDER   SECTION    13 

[Superseding  Regulation  A  of  1917] 

"(a)  DEFINITION.— A  draft  or  bill  of  exchange,  within 
the  meaning  of  this  regulation,  is  defined  as  an  unconditional 
order  in  writing,  addressed  by  one  person  to  another,  signed  by 
the  person  giving  it,  requiring  the  person  to  whom  it  is  addressed 
to  pay  in  the  United  States,  at  a  fixed  or  determinable  future 
time,  a  sum  certain  in  dollars  to  the  order  of  a  specified  person; 
and  a  trade  acceptance  is  defined  as  a  draft  or  bill  of  exchange, 
drawn  by  the  seller  on  the  purchaser  of  goods  sold,*  and  ac- 
cepted by  such  purchaser. 

"(b)  EVIDENCE  OF  ELIGIBILITY  AND  REQUIRE- 
MENT OF  STATEMENTS.— A  Federal  reserve  bank  shall  take 
such  steps  as  it  deems  necessary  to  satisfy  itself  as  to  the 
eligibility  of  the  draft,  bill,  or  trade  acceptance  offered  for  re- 
discount and  may  require  a  recent  financial  statement  of  one  or 
more  parties  to  the  instrument.  The  draft,  bill,  or  trade  accept- 
ance should  be  drawn  so  as  to  evidence  the  character  of  the 
underlying  transaction,  but  if  it  is  not  so  drawn  evidence  of 
eligibility  may  consist  of  a  stamp  or  certificate  afifixed  by  the 
acceptor  or  drawer  in  a  form  satisfactory  to  the  Federal  reserve 
bank." 

'  IRefers   to   general    character   of   notes,    drafts,    and    biUs   of   exchange 

eligible  It  must  not  be  a  note,  draft,  or  bill  of  exchange  the  proceeds 
of  which  have  been  u.sed  or  are  to  be  used  for  permanent  or  fixed 
Investments  of  any  kind,  such  as  land,  buildings,  or  machinery,  or  for 
any  other  capital  purpose.  .        ,        ,        ,  ^  ».    v» 

•A  consignment  of  goods  or  a  conditional  sale  of  goods  can  not  be 
considered  "goods  sold"  within  the  meaning  of  this  clause.  The  pur- 
chase price  of  goods  plus  the  cost  of  labor  in  effecting  their  Installation 
may  be  included  in  the  amount   for  which  the   trade  acceptance  Is  drawn. 

-73- 


Six  Months*  Agricultural  Paper 

Regulation  A,  Series  of  1920 

REDISCOUNTS   UNDER   SECTION    13 

[Superseding  Regulation  A  of  1917] 

"(a)  DEFINITION.— Six  months'  agricultural  paper, 
within  the  meaning  of  this  regulation,  is  defined  as  a  note, 
draft,  bill  of  exchange,  or  trade  acceptance  drawn  or  issued  for 
agricultural  purposes,  or  based  on  live  stock;  that  is,  a  note,  draft, 
bill  of  exchange,  or  trade  acceptance  the  proceeds  of  wliich  have 
been  used,  or  are  to  be  used,  for  agricultural  purposes,  including 
the  breeding,  raising,  fattening,  or  marketing  of  live  stock,  and 
which  has  a  maturity  at  the  time  of  discount  of  not  more  than 
six  months,  exclusive  of  days  of  grace. 

"(b)  ELIGIBILITY.— To  be  eligible  for  rediscount,  six 
months'  agricultural  paper,  whether  a  note,  draft,  bill  of  ex- 
change, or  trade  acceptance,  must  comply  with  the  respective 
sections  of  this  regulation  which  would  apply  to  it  if  its  maturity 
were  90  days  or  less." 


Rediscount  of  Bankers*  Acceptances 

Regulation  A,  Series  of  1920 

REDISCOUNTS   UNDER    SECTION    13 

[Superseding  Regulation  A  of  1917] 

"(a)  DEFINITION. — A  banker's  acceptance  within  the 
meaning  of  this  regulation  is  defined  as  a  draft  or  bill  of  ex- 
change, whether  payable  in  the  United  States  or  abroad  and 
whether  payable  in  dollars  or  some  other  money,  of  which  the 
acceptor  is  a  bank  or  trust  company,  or  a  firm,  person,  com- 
pany, or  corporation  engaged  generally  in  the  business  of  grant- 
ing bankers'  acceptance  credits. 

"(b)  ELIGIBILITY. — A  Federal  reserve  bank  may  redis- 
count any  such  bill  having  a  maturity  at  time  of  discount  of 
not  more  than  three  months,  exclusive  of  days  of  grace,  which 
has  been  drawn  under  a  credit  opened  for  the  purpose  of  con- 
ducting or  settling  accounts  resulting  from  a  transaction  or 
transactions  involving  any  one  of  the  following: 

"(1)  The  shipment  of  goods  between  the  LTnited 
States  and  any  foreign  country,  or  between  the  United 
States  and  any  of  its  dependencies  or  insular  possessions, 
or  between  foreign  countries.  While  it  is  not  necessary 
that  shipping  documents  covering  goods  in  the  process  of 
shipment  be  attached  to  drafts  drawn  for  the  purpose  of 
financing   the   exportation   or  importation   of  goods,   and 

—  74  — 


while  it  is  not  essential,  therefore,  that  each  such  draft 
cover  specific  goods  actually  in  existence  at  the  time  of 
acceptance,  nevertheless  it  is  essential  as  a  prerequisite  to 
eligibility  either  (a)  that  shipping  documents  or  a  docu- 
mentary export  draft  be  attached  at  the  time  the  draft  is 
presented  for  acceptance,  or  (b)  if  the  goods  covered  by 
the  credit  have  not  been  actually  shipped,  that  there  be  in 
existence  a  specific  and  bona  fide  contract  providing  for 
the  exportation  or  importation  of  such  goods  at  or  within 
a  specified  and  reasonable  time  and  that  the  customer 
agree  that  the  accepting  bank  will  be  furnished  in  due 
course  with  shipping  documents  covering  such  goods  or 
with  exchange  arising  out  of  the  transaction  being 
financed  by  the  credit.  A  contract  between  principal  and 
agent  will  not  be  considered  a  bona  fide  contract  of  the 
kind  required  above,  nor  is  it  enough  that  there  be  a  con- 
tract providing  merely  that  the  proceeds  of  the  accept- 
ance will  be  used  only  to  finance  the  purchase  or  shipment 
of  goods  to  be  exported  or  imported ; 

"(2)  The  shipment  of  goods  within  the  United 
States,  provided  shipping  documents  conveying  security 
title  are  attached  at  the  time  of  acceptance,  or 

"(3)  The  storage  of  readily-marketable  staples,*  pro- 
vided that  the  bill  is  secured  at  the  time  of  acceptance  by 
a  warehouse,  terminal  or  other  similar  receipt,  conveying 
security  title  to  such  staples,  issued  by  a  party  independent 
of  the  customer,  and  provided  further  that  the  acceptor 
remains  secured  throughout  the  life  of  the  acceptance.  In 
the  event  that  the  goods  must  be  withdrawn  from  storage 
prior  to  the  maturity  of  the  acceptance  or  the  retirement 
of  the  credit,  a  trust  receipt  or  other  similar  document 
covering  the  goods  may  be  substituted  in  lieu  of  the 
original  document,  provided  that  such  substitution  is  con- 
ditioned upon  a  reasonably  prompt  liquidation  of  the 
credit.  In  order  to  insure  compliance  with  this  condition, 
it  should  be  required,  when  the  original  document  is  re- 
leased, either  (a)  that  the  proceeds  of  the  goods  will  be 
applied  within  a  specified  time  toward  a  liquidation  of  the 
acceptance  credit  or  (b)  that  a  new  document,  similar  to 
the  original  one,  will  be  resubstituted  within  a  specified 
time, 
and  a  Federal  reserve  bank  may  also  rediscount  any  bill  drawn 

•  A  readily-marketable  staple  within  the  meaning  of  these  regula- 
tions may  be  deHned  as  an  article  of  commerce,  agriculture,  or  industry 
of  such  uses  a»  to  make  It  the  subject  of  constant  dealings  In  ready 
markets  with  such  frequent  quotations  of  price  as  to  make  (a)  the  price 
easily  and  definitely  aacertalnable  and  (b)  the  staple  itself  easy  to 
realize  upon  by  Mile  at  any   time. 

—  75  — 


by  a  bank  or  banker  in  a  foreign  country  or  dependency  or 
insular  possession  of  the  United  States  for  the  purpose  of  fur- 
nishing dollar  exchange,  as  provided  in  Regulation  C,  provided 
that  it  has  a  maturity  at  the  time  of  discount  of  not  more  than 
three  months,  exclusive  of  days  of  grace. 

"(c)  GENERAL  CONDITIONS.— (1)  Acceptances  in  excess 
of  10  per  cent. — In  order  to  be  eligible,  acceptances  for  any  one 
customer  in  excess  of  10  per  cent,  of  the  capital  and  surplus  of 
the  accepting  bank  must  remain  actually  secured  throughout  the 
life  of  the  acceptance.  In  the  case  of  acceptances  of  member 
banks,  this  security  must  consist  of  shipping  documents,  ware- 
house receipts,  or  other  such  documents,  or  some  other  actual 
security  grov^ring  out  of  the  same  transaction  as  the  acceptance, 
such  as  documentary  drafts,  trade  acceptances,  terminal  receipts, 
or  trust  receipts  which  cover  goods  of  such  a  character  as  to 
insure  at  all  times  a  continuance  of  an  effective  and  lawful  lien 
in  favor  of  the  accepting  bank.  Other  trust  receipts  are  not 
secured  within  the  meaning  of  this  paragraph  if  they  permit  the 
customer  to  have  access  to  or  control  over  the  goods. 

"(2)  Maturity. — Ahhough  a  Federal  reserve  bank  may  legally 
rediscount  an  acceptance  having  a  maturity  at  the  time  of  dis- 
count of  not  more  than  three  months,  exclusive  of  days  of  grace, 
it  may  decline  to  rediscount  any  acceptance  the  maturity  of 
which  is  in  excess  of  the  usual  or  customary  period  of  credit 
required  to  finance  the  underlying  transaction  or  which  is  in 
excess  of  that  period  reasonably  necessary  to  finance  such  trans- 
action. Since  the  purpose  of  permitting  the  acceptance  of  drafts 
secured  by  warehouse  receipts  or  other  such  documents  is  to 
permit  of  the  temporary  holding  of  readily-marketable  staples  in 
storage  pending  a  reasonably  prompt  sale,  shipment,  or  distribu- 
tion, no  such  acceptance  should  have  a  maturity  in  excess  of  the 
time  ordinarily  necessary  to  effect  a  reasonably  prompt  sale, 
shipment,  or  distribution  into  the  process  of  manufacture  or 
consumption. 

"(3)  Reiieivals. — While  a  national  bank  may  properly  enter 
into  an  agreement  having  more  than  six  months  to  run  by  which 
it  obligates  itself  to  accept  drafts  of  the  kinds  described  in 
Regulation  C,  each  individual  draft  accepted  under  the  terms  of 
that  agreement  must,  in  order  to  be  eligible,  conform  in  all 
respects  to  the  provisions  of  the  law  and  these  regulations.  In- 
asmuch as  each  individual  acceptance  must  itself  conform  to  the 
terms  of  the  law,  no  renewal  draft,  whether  or  not  contracted  for 
in  advance,  can  be  eligible  if  at  the  time  of  its  acceptance  the 
period  required  for  the  conclusion  of  the  transaction  out  of 
which  the  original  draft  was  drawn  shall  have  elapsed.  The 
question  of  the  eligibility  of  renewal  drafts,  therefore,  must  nee- 

—  76  — 


essarily  depend  upon  the  stage  of  the  transaction  at  the  time  tlie 
renewal  drafts  are  drawn. 

"(d)  EVIDENCE  OF  ELIGIBILITY.— A  Federal  re- 
serve bank  must  be  satisfied,  either  bj'-  reference  to  the  accept- 
ance itself,  or  otherwise,  that  it  is  eligible  for  rediscount.  The 
bill  itself  should  be  drawn  so  as  to  evidence  the  character  of  the 
underlying  transaction,  but  if  it  is  not  so  drawn  evidence  of 
eligibility  may  consist  of  a  stamp  or  certificate  affixed  by  the 
acceptor  in  form  satisfactory  to  the  Federal  reserve  bank." 


Acceptance  of  Drafts  and  Bills  of  Exchange 

Regulation  C,  Series  of  1917 

ACCEPTANCE  BY    MEMBER   BANKS   OF  DRAFTS   AND  BILLS   OF   EXCHANGE 

[Superseding  Regulation  C  of  1916] 

By  the  amendments  approved  September  7,  1916,  and  June  21, 
1917,  the  fifth  paragraph  of  Section  13  of  the  Federal  Reserve 
Act  permits  member  banks,  under  the  specified  conditions,  to  ac- 
cept drafts  or  bills  of  exchange  growing  out  of  transactions  in- 
volving the  importation  or  exportation  of  goods,  or  the  domestic 
shipment  of  goods,  provided  shipping  documents  conveying  or 
securing  title  are  attached  at  the  time  of  acceptance ;  or  which  are 
secured  at  the  time  of  acceptance  by  a  warehouse  receipt  or  othei 
such  document  conveying  or  securing  title  covering  readily-mar- 
ketable staples.* 

Where  the  accepting  bank  is  secured  either  by  attached  docu- 
ments or  by  some  other  actual  security  growing  out  of  the  same 
transaction  as  the  acceptance,  any  bank  may  accept  such  bills  in 
an  amount  not  exceeding  at  any  time,  in  the  aggregate,  more  than 
one-half  of  its  paid-up  and  unimpaired  capital  stock  and  surplus ; 
or,  upon  the  approval  of  the  Federal  Reserve  Board,  may  accept 
up  to  an  amount  not  exceeding  100  per  centum  of  its  paid-up  and 
unimpaired  capital  stock  and  surplus.  The  aggregate  amount  of 
acceptances  growing  out  of  domestic  transactions  shall  in  no  case, 
however,  exceed  50  per  centum  of  such  capital  stock  and  surplus. 

The  regulations  of  the  Federal  Reserve  Board,  covering  this 
part  of  Section  13  of  the  Federal  Reserve  Act,  are  as  follows: 

•  A  readily-marketable  staple  within  the  meaning  of  these  regulations  may  be 
defined  as  an  article  of  commerce,  agriculture,  or  industry  of  such  uses  as  to  make 
It  the  subject  of  constant  dealings  in  ready  markets,  with  such  frequent  quotations 
of  price  as  to  make  (a)  the  price  easily  and  definitely  ascertainable  and  (b)  the  staple 
Itself   easy    to   realize   upon    by    sale   at   any   time. 


77  — 


"The  Federal  Reserve  Board  has  determined  that  any  mem- 
ber bank,  having  an  unimpaired  surplus  equal  to  at  least  20  per 
centum  of  its  paid-up  capital,  which  desires  to  accept  drafts  or  bills 
of  exchange  (drawn  for  the  purposes  previously  described)  up  to  an 
amount  not  exceeding  at  any  time,  in  the  aggregate,  100  per  centum 
of  its  paid-up  and  unimpaired  capital  stock  and  surplus,  may  file  an 
application  for  that  purpose  with  the  Federal  Reserve  Board.  Such 
application  must  be  forwarded  through  the  Federal  reserve  bank 
of  the  district  in  which  the  applying  bank  is  located. 

"The  Federal  reserve  bank  shall  report  to  the  Federal  Reserve 
Board  upon  the  standing  of  the  applying  bank,  stating  whether  the 
business  and  banking  conditions  prevailing  in  its  district  warrant 
the  granting  of  such  applications. 

"The  approval  of  any  such  application  may  be  rescinded  upon 
90  days'  notice  to  the  bank  affected." 


Bills  Drawn  to  Create  "Dollar  Exchange" 

Regulation  C,  Series  of  1917 

ACCEPTANCE   BY    MEMBER   BANKS   OF   DRAFTS   AND  BILLS    OF   EXCHANGE 

[Superseding  Regulation  C  of  1916] 

Under  the  provisions  of  Section  13  of  the  Federal  Reserve 
Act,  member  banks  are  also  permitted  to  accept  drafts  or  bills 
of  exchange  drawn  by  banks  or  bankers  in  foreign  countries  or 
dependencies  or  insular  possessions  of  the  United  States  for  the 
purpose  of  creating  "dollar  exchange."  Such  drafts  or  bills  must 
have  not  more  than  three  months'  sight  to  run,  exclusive  of  days 
of  grace,  and  no  member  bank  shall  accept  them  for  any  one  bank 
to  an  amount  exceeding  in  the  aggregate  10  per  centum  of  the 
paid-up  and  unimpaired  capital  and  surplus  of  the  accepting  bank, 
unless  the  draft  or  bill  is  accompanied  by  documents  conveying 
or  securing  title  or  by  some  other  adequate  security.  It  is  further 
stipulated  that  no  member  bank  shall  accept  such  drafts  or  bills 
in  an  amount  exceeding  at  any  time  in  the  aggregate  one-half  of 
its  paid-up  and  unimpaired  capital  and  surplus.  This  50  per  cent, 
limit  is  separate  and  distinct  from  and  not  included  in  the  limits 
placed  upon  the  acceptance  of  drafts  and  bills  as  described  in  the 
fifth  paragraph  of  Section  13. 

The  regulations  of  the  Federal  Reserve  Board  on  the  drawing 
of  drafts  or  bills  for  the  purpose  of  furnishing  "dollar  exchange" 
follow : 

—  78  — 


"Any  member  bank  desiring  to  accept  drafts  drawn  by  banks 
or  bankers  in  foreign  countries  or  dependencies  or  insular  posses- 
sions of  the  United  States  for  the  purpose  of  furnishing  dollar 
exchange  shall  first  make  an  application  to  the  Federal  Reserve 
Board  setting  forth  the  usages  of  trade  in  the  respective  countries, 
dependencies,  or  insular  possessions  in  which  such  banks  or  bankers 
are  located. 

"If  the  Federal  Reserve  Board  should  determine  that  the  usages 
of  trade  in  such  countries,  dependencies,  or  possessions  require 
the  granting  of  the  acceptance  facilities  applied  for,  it  will  notify 
the  applying  bank  of  its  approval  and  will  also  publish  in  the  Fed- 
eral Reserve  Bulletin  the  name  or  names  of  those  countries,  de- 
pendencies, or  possessions  in  which  banks  or  bankers  are  authorized 
to  draw  on  member  banks  whose  applications  have  been  approved 
for  the  purpose  of  furnishing  dollar  exchange. 

"The  Federal  Reserve  Board  reserves  the  right  to  modify  or  on 
90  days'  notice  to  revoke  its  approval  either  as  to  any  particular 
member  bank  or  as  to  any  foreign  country  or  dependency  or  insular 
possession  of  the  United  States  in  which  it  has  authorized  banks  or 
bankers  to  draw  on  member  banks  for  the  purpose  of  furnishing 
dollar  exchange." 

In  Regulation  C,  Series  of  1920,  the  only  change  from  Regula- 
tion C  of  1917,  previously  given,  is  the  inclusion  of  two  sentences 
with  reference  to  the  question  of  when  trust  receipts  and  bills  of 
lading  drafts  may  be  considered  "actual  security"  within  the  mean- 
ing of  Section  13  of  the  Federal  Reserve  Act.  It  is  stated  in  this 
connection  that  a  trust  receipt  which  permits  the  customer  to  have 
access  to  or  control  over  the  goods  will  not  be  considered  by  Fed- 
eral reserve  banks  to  be  "actual  security"  within  the  meaning  of 
Section  13,  but  a  bill  of  lading  draft  is  "actual  security"  even  after 
the  documents  have  been  released,  provided  that  the  draft  is  ac- 
cepted by  the  drawee  upon  or  before  the  surrender  of  the  docu- 
ments. 

Operations  of  Foreign  Banking  Corporations 

Regulation  K,  Series  of  1920 

banking   corporations   authorized  to   do   foreign    banking   business   under 
Section  25  (a) 

As  amended  by  the  Act  of  September  7,  1916,  Section  25  of 
the  Federal  Reserve  Act  permitted  national  banks  having  a  capital 
and  surplus  of  $1,000,000  or  more,  to  invest,  under  certain  specified 
conditions,  in  the  stock  of  banks  or  corporations  chartered  or  in- 

—  79  — 


coiporated  under  the  laws  of  the  United  States  or  of  any  State 
thereof,  and  principally  engaged  in  international  or  foreign  banking. 
At  that  time,  no  means  had  been  provided  for  the  Federal 
incorporation  of  such  foreign  banking  corporations,  but  by  the 
enactment  of  Section  25  (a)  of  the  Federal  Reserve  Act,  approved 
December  24,  1919,  Congress  provided  a  means  for  the  incorpora- 
tion of  institutions  for  the  purpose  of  engaging  in  international 
or  foreign  banking  or  other  international  or  foreign  financial  opera- 
tions in  whose  stock  national  banks,  as  well  as  individuals,  firms, 
and  other  corporations,  may  invest.  Under  the  regulations  cover- 
ing this  section  of  the  Federal  Reserve  Act,  a  Corporation*  is  per- 
mitted to  accept,  subject  to  substantially  the  same  conditions  as  are 
imposed  by  law  upon  member  banks,  drafts  drawn  by  banks  or 
bankers  located  in  foreign  countries,  or  dependencies  or  insular 
possessions  of  the  United  States,  for  the  purpose  of  furnishing 
dollar  exchange  as  required  by  the  usages  of  trade  in  those  coun- 
tries, dependencies,  or  possessions. 

The  regulations  of  the  Federal  Reserve  Board,  governing 
Acceptances  under  Section  25  (a),  known  as  the  Edge  Bill,  are  as 
follows : 

"Kinds. — Any  corporation  may  accept  (1)  drafts  and  bills  of 
exchange  drawn  upon  it  which  grow  out  of  transactions  involv- 
ing the  importation  or  exportation  of  goods,  and  (2)  drafts  and 
bills  of  exchange  which  are  drawn  by  banks  or  bankers  located 
in  foreign  countries  or  dependencies  or  insular  possessions  of 
the  United  States  for  the  purpose  of  furnishing  dollar  exchange 
as  required  by  the  usages  of  trade  in  such  countries,  depen- 
dencies, and  possessions,  provided,  however,  that,  except  with 
the  approval  of  the  Federal  Reserve  Board  and  subject  to  such 
limitations  as  it  may  prescribe,  no  Corporation  shall  exercise 
its  power  to  accept  drafts  or  bills  of  exchange  if  at  the  time  such 
drafts  or  bills  are  presented  for  acceptance  it  has  outstanding 
any  debentures,  bonds,  notes,  or  other  such  obligations  issued 
by  it. 

"Maturity. — Except  with  the  approval  of  the  Federal  Reserve 
Board,  no  Corporation  shall  accept  any  draft  or  bill  of  exchange 
which  grows  out  of  a  transaction  involving  the  importation  or 
exportation  of  goods  with  a  maturity  in  excess  of  six  months, 
or  shall  accept  any  draft  or  bill  of  exchange  drawn  for  the  pur- 
pose of  furnishing  dollar  exchange  with  a  maturity  in  excess  of 
three  months. 


•Wherever  the  word  Corporation  la  spelled  with  a  capital  C,  it 
refers  to  a  corporation  organized  under  Section  25  (a)  of  the  Federal 
Reserve   Act. 


"Limitations.— {\)  Individual  drawers:  No  acceptances  shall 
he  made  for  the  account  of  any  one  drawer  in  an  amount  aggre- 
gating at  any  time  in  excess  of  10  per  cent,  of  the  subscribed 
capital  and  surplus  of  the  Corporation,  unless  the  transaction  be 
fully  secured  or  represents  an  exportation  or  importation  of 
commodities  and  is  guaranteed  by  a  bank  or  banker  of  undoubted 
solvency.  (2)  Aggregates:  Whenever  the  aggregate  of  accept- 
ances outstanding  at  any  time  (a)  exceeds  the  amount  of  the  sub- 
scribed capital  and  surplus,  50  per  cent,  of  all  the  acceptances 
in  excess  of  the  amount  shall  be  fully  secured;  or  (b)  exceeds 
twice  the  amount  of  the  subscribed  capital  and  surplus,  all  the 
acceptances  outstanding  in  excess  of  such  amount  shall  be  fully 
secured.  (The  Corporation  shall  elect  whichever  requirement 
(a)  or  (b)  calls  for  the  smaller  amount  of  secured  acceptances). 
In  no  event  shall  any  Corporation  have  outstanding  at  any  one 
time  acceptances  drawn  for  the  purpose  of  furnishing  dollar 
exchange  in  an  amount  aggregating  more  than  50  per  cent,  of 
its  subscribed  capital  and  surplus. 

" Reserves.— Kgdiinst  all  acceptances  outstanding  which  mature 
in  30  days  or  less  a  reserve  of  at  least  15  per  cent,  shall  be 
maintained,  and  against  all  acceptances  outstanding  which  mature 
in  more  than  30  days  a  reserve  of  at  least  3  per  cent,  shall  be 
maintained.  Reserves  against  acceptances  must  be  in  liquid 
assets  of  any  or  all  of  the  following  kinds:  (1)  cash;  (2)  balances 
with  other  banks;  (3)  bankers'  acceptances;  and  (4)  such  secu- 
rities as  the  Federal  Reserve  Board  may  from  time  to  time 
permit." 


—  81  — 


Chapter  IX 

THE  UNITED  STATES  WAREHOUSE  ACT 

BECAUSE  of  its  bearing  on  the  subject  of  Acceptances,  the 
text  of  certain  portions  of  the  United  States  Warehouse  Act 
should  prove  both  interesting  and  instructive  to  readers  of  this 
booklet.  Therefore,  those  parts  of  the  Act  which  have  a  relation 
to  the  Acceptance  matter  are  outlined  in  this  chapter. 

The  United  States  Warehouse  Act,  which  was  amended  July 
24,  1919,  specifies  the  conditions  under  which  agricultural  products 
may  be  stored  in  warehouses  for  interstate  or  foreign  commerce, 
and  fixes  the  duties  and  responsibilities  of  warehousemen  in  con- 
nection therewith.  As  used  in  the  Act,  the  term  "agricultural 
product"  means  cotton,  wool,  grains,  tobacco,  and  flaxseed,  or  any 
of  them.  The  Secretary  of  Agriculture  is  empowered  to  issue 
licenses  for  the  conduct  of  warehouses  in  accordance  with  the  law, 
and  to  promulgate  such  rules  and  regulations  governing  operations 
under  the  Act  as  may  be  deemed  necessary.  He  may  also  grant  a 
license  to  any  person  not  a  warehouseman  to  accept  the  custody 
of  agricultural  products  and  to  store  them  in  a  warehouse  owned, 
operated,  or  leased  by  any  State,  but  such  person  must  agree  to 
comply  with  the  provisions  of  the  Act  and  the  rules  and  regulations 
prescribed  thereunder. 

Receipts  for  Agricultural  Products  Stored 

In  the  immediately  preceding  chapter  of  this  booklet — Regula- 
tions of  the  Federal  Reserve  Board — reference  is  made  to  the  stor- 
age of  readily-marketable  staples,  and  to  the  acceptance  of  drafts 
and  bills  of  exchange  secured  by  warehouse  receipts.  One  of  the 
requirements  of  the  United  States  Warehouse  Act  is  that  a  ware- 

—  82  — 


houseman  or  any  person  accepting  the  custody  of  agricultural 
products  under  the  terms  of  the  Act  shall  issue  receipts  for  such 
products,  but  no  receipts  shall  be  issued  except  for  agricultural 
products  actually  stored  in  the  warehouse  at  the  time  of  the  issu- 
ance thereof. 

It  is  further  stipulated  that  every  warehouseman  shall  keep 
the  agricultural  products  therein  of  one  depositor  so  far  separate 
from  agricultural  products  of  other  depositors,  and  from  other  agri- 
cultural products  of  the  same  depositor  for  which  a  separate  receipt 
has  been  issued,  as  to  permit  at  all  times  the  identification  and  re- 
delivery of  the  agricultural  products  deposited.  If  authorized  by 
agreement  or  custom,  however,  a  warehouseman  may  mingle  fun- 
gible agricultural  products  with  other  agricultural  products  of  the 
same  kind  and  grade,  but  he  must  not  mix  fungible  agricultural 
products  of  dififerent  grades.  Where  fungible  agricultural  products 
of  the  same  kind  and  grade  are  mingled,  the  warehouseman  shall  be 
severally  liable  to  each  depositor  for  the  care  and  re-delivery  of 
his  share  of  such  mass. 


Contents  of  a  Warehouse  Receipt 

The  provisions  of  the  Act  which  prescribe  the  contents  of  a 
warehouse  receipt  are  of  especial  interest  and  importance. 

Section  18  requires  that  every  receipt  issued  for  agricultural 
products  stored  in  a  warehouse  licensed  under  the  Act  shall  embody 
within  its  written  or  printed  terms  the  location  of  the  warehouse  in 
which  such  products  are  stored,  the  date  of  the  issue  of  the  receipt, 
the  consecutive  number  of  the  receipt,  and  a  statement  whether  the 
agricultural  products  received  will  be  delivered  to  the  bearer,  to  a 
specified  person,  or  to  a  specified  person  or  his  order. 

The  rate  of  storage  charges  must  also  be  stated,  and  a  descrip- 
tion given  of  the  agricultural  products  received.  The  latter  must 
show  the  quantity  thereof,  or  in  the  case  of  agricultural  products 
customarily  put  up  in  bales  or  packages,  a  description  of  such  bales 
or  packages  by  marks,  numbers,  or  other  means  of  identification, 
and  the  weight  of  such  bales  or  packages.  Section  18  of  the  Act 
also  includes  a  clause  which  specifies  that  the  receipt  must  indicate 

"the  grade  or  other  class  of  the  agricultural  products  received 
and  the  standard  or  description  in  accordance  with  which  such 

—  83  — 


classification  has  been  made:  Provided,  That  such  grade  or  other 
class  shall  be  stated  according  to  the  official  standard  of  the 
United  States  applicable  to  such  agricultural  products  as  the 
same  may  be  fixed  and  promulgated  under  authority  of  law: 
Provided,  further.  That  until  such  official  standards  of  the  United 
States  for  any  argricultural  product  or  products  have  been  fixed 
and  promulgated,  the  grade  or  other  class  thereof  may  be  stated 
in  accordance  with  any  recognized  standard  or  in  accordance 
with  such  rules  and  regulations  not  inconsistent  herewith  as  may 
be  prescribed  by  the  Secretary  of  Agriculture." 

In  addition  to  the  foregoing  requirements,  it  must  be  shown 
that  the  receipt  is  issued  subject  to  the  United  States  Warehouse 
Act  and  the  rules  and  regulations  prescribed  thereunder.  If  the 
receipt  be  issued  for  agricultural  products  of  which  the  warehouse- 
man is  owner,  either  solely  or  jointly  or  in  common  with  others, 
the  fact  of  such  ownership  must  be  declared. 

A  statement  is  also  required  of  the  amount  of  advances  made 
and  of  liabilities  incurred  for  which  the  warehouseman  claims  a 
lien.  Where  the  precise  amount  is  unknown  to  the  warehouseman 
or  his  agent  at  the  time  of  the  issue  of  the  receipt,  a  declaration 
of  the  fact  that  advances  have  been  made  or  liabilities  incurred,  and 
the  purpose  thereof,  shall  be  sufficient. 

The  receipt  must  contain  the  signature  of  the  warehouseman, 
Vhich  may  be  made  by  his  authorized  agent. 

Unless  otherwise  required  by  the  law  of  the  State  in  which 
?he  warehouse  is  located,  when  requested  by  the  depo.sitor  of  other 
than  fungible  agricultural  products,  a  receipt  omitting  compliance 
with  subdivision  (g)  of  Section  18  (quoted  above)  may  be  issued. 

Issue  of  Other  Than  Original  Receipts 

The  terms  of  the  Act  which  relate  to  the  issue  of  other  than 
original  receipts  stipulate  that  while  an  original  receipt  is  outstand- 
ing and  uncanceled  by  the  warehouseman  issuing  the  same,  no  other 
or  further  receipt  shall  be  issued  for  the  agricultural  product  cov- 
ered thereby,  or  for  any  part  thereof. 

In  the  case  of  a  lost  or  destroyed  receipt,  however,  a  new  re- 
ceipt, subject  to  the  same  conditions  and  bearing  on  its  face  the 
number  and  date  of  the  receipt  in  lieu  of  which  it  is  issued,  may  be 
issued   upon   compliance  with   the   statutes  of  the  United   States 

—  84  — 


applicable  thereto  in  places  under  the  exclusive  jurisdiction  of  the 
United  States,  or  upon  compliance  with  the  laws  of  any  State  ap- 
plicable thereto  in  any  place  not  under  the  exclusive  jurisdiction  of 
the  United  States. 

If  there  be  in  such  instance  no  statute  of  the  United  States  or 
law  of  a  State  applicable  thereto,  such  new  receipts  may  be  issued 
upon  the  giving  of  satisfactory  security  in  compliance  with  the  rules 
and  regulations  made  pursuant  to  the  Warehouse  Act. 

Conditions  Governing  Delivery  of  Products 

In  the  absence  of  some  lawful  excuse,  a  warehouseman  shall, 
without  unnecessary  delay,  deliver  the  agricultural  products  in  his 
custody  upon  a  demand  made  either  by  the  holder  of  a  receipt  for 
such  agricultural  products  or  by  the  depositor  thereof.  Such  de- 
mand, however,  must  be  accompanied  with  an  offer  to  satisfy  the 
warehouseman's  lien,  an  offer  to  surrender  the  receipt,  if  negotiable, 
with  such  indorsements  as  would  be  necessary  for  the  negotiation 
of  the  receipt,  and  a  readiness  and  willingness  to  sign,  when  the 
products  are  delivered,  an  acknowledgment  that  they  have  been 
delivered,  if  such  signature  is  requested  by  the  warehouseman. 

A  warehouseman,  in  turn,  is  required  to  plainly  cancel  upon 
the  face  thereof  each  receipt  returned  to  him  upon  the  delivery  by 
him  of  the  agricultural  products  for  which  the  receipt  was  issued. 

State  Laws  Not  Impaired  by  Act 

Every  warehouseman  must  keep  in  a  place  of  safety  complete 
and  correct  records  of  all  agricultural  products  in  his  custody  or 
withdrawn  from  his  custody,  of  all  warehouse  receipts  issued  by 
him,  and  of  the  receipts  returned  to  and  canceled  by  him. 

Nothing  in  the  United  States  Warehouse  Act  shall  be  con- 
strued to  conflict  with,  or  to  authorize  any  conflict  with,  or  in  any 
way  to  impair  or  limit  the  effect  or  operation  of  the  Uniform  Ware- 
house Receipts  Act,  which  is  a  State  measure,  or  the  laws  of  any 
State  relating  to  warehouses,  warehousemen,  weighers,  graders,  or 
classifiers.  The  Secretary  of  Agriculture  is  authorized  to  co- 
operate with  such  officials  as  are  charged  with  the  enforcement  of 
such  State  laws  in  such  States,  and  through  such  co-operation  to 

—  85  — 


secure  the  enforcement  of  the  provisions    of    the    United    States 
Warehouse  Act. 

The  Act  shall  not  be  construed  so  as  to  limit  the  operation 
of  any  statute  of  the  United  States  relating  to  warehouses  or  ware- 
housemen, weighers,  graders,  or  classifiers  now  in  force  in  the  Dis- 
trict of  Columbia  or  in  any  Territory  or  other  place  under  the  ex- 
clusive jurisdiction  of  the  United  States. 

Regulations  for  Wool  Warehouses 

In  accordance  with  the  authority  conferred  upon  him  by  the 
terms  of  the  United  States  Warehouse  Act,  the  Secretary  of  Agri- 
culture, under  date  of  June  18,  1920,  made  public  rules  and  regula- 
tions governing  the  operation  of  wool  warehouses. 

It  is  the  object  here  to  outline,  as  briefly  as  possible,  those 
portions  of  the  rules  and  regulations  which  relate  to  the  issuance 
of  receipts  for  wool  stored  in  a  licensed  warehouse.  Every  such 
receipt  shall,  in  addition  to  complying  with  the  requirements  of 
Section  18  of  the  Warehouse  Act,  previously  summarized,  meet  cer- 
tain specified  conditions  contained  in  the  rules  and  regulations  pro- 
mulgated by  the  Secretary  of  Agriculture. 

One  of  these  conditions  is  that  the  contents  of  a  receipt  cover- 
ing wool  in  storage  must  include  a  declaration  of  the  kind  of  wool. 
The  receipt  shall  have  a  blank  space  designated  for  the  purpose, 
in  which,  if  the  identity  of  the  wool  is  to  be  preserved,  a  careful 
estimate  of  the  shrinkage  of  the  wool  may  be  stated,  or  in  which,  if 
the  identity  of  the  wool  is  not  to  be  preserved,  an  estimate  of  the 
shrinkage  of  the  wool  shall  be  given. 

Negotiable  and  Non-Negotiable  Receipts 

If  the  identity  of  the  wool  is  to  be  preserved,  its  identification 
in  accordance  with  Regulation  5,  Section  16,*  is  required.  Where 
the  identity  of  the  wool  is  not  to  be  preserved,  a  clear  and  con- 


•Regulatlon  5,  Section  16.  Upon  the  acceptance  by  a  licensed  warehouseman  for 
storage  In  his  licensed  warehouse  of  any  lot  of  wool,  the  identity  of  which  is  to  be 
preserved,  he  shall  store,  or  cause  to  be  stored,  such  wool  in  an  individual  section  or 
space  designated  by  lot  or  cargo  numbers,  or  by  letters,  numbers,  or  other  clearly 
distinguishable  words  or  signs,  permanently  and  securely  affixed  thereto,  or  shall  so 
mark  the  container  or  containers  of  such  wool  or  so  place  the  wool  In  the  warehouse 
that   Ita  Identity   will   not   be   lost   during   the   storage   period. 

—  86  — 


spicuous  notation  to  that  effect  shall  be  made  on  the  face  of  the 
receipt. 

The  nature  of  the  receipt  must  be  indicated  by  the  words  "Not 
Negotiable,"  "Non-Negotiable,"  or  "Negotiable,"  clearly  and  con- 
spicuously printed  or  stamped  thereon. 

It  is  also  required  that  a  receipt,  whether  negotiable  or  non- 
negotiable,  embody  within  its  written  or  printed  terms  notice  that 
the  person  entitled  to  the  re-delivery  of  the  wool  shall  demand  the 
delivery  of  the  wool  not  later  than  the  expiration  of  one  year  from 
the  date  of  the  receipt.  This  applies  whether  such  person  be  the 
depositor  of  the  wool  or  the  lawful  holder  of  the  receipt  therefor. 

If  the  wool  covered  by  a  negotiable  receipt  was  graded  by  a 
licensed  grader  or  weighed  by  a  licensed  weigher,  a  statement  to 
that  effect  shall  be  made.  Whenever  the  grade  of  wool  is  required 
to  be,  or  is,  stated  in  a  receipt,  such  grade  shall  be  stated,  until 
such  time  as  official  wool  standards  of  the  United  States  are  in 
effect,  in  accordance  with  the  State  standards,  if  any,  established 
in  the  State  in  which  the  warehouse  is  located.  In  the  absence  of 
any  State  standards,  the  grade  shall  be  stated  in  accordance  with 
the  standards,  if  any,  adopted  by  any  wool  organization  or  by  the 
wool  trade  generally  in  the  locality  in  which  the  warehouse  is 
located,  subject  to  the  approval  of  the  Chief  of  the  Bureau  of  Mar- 
kets, or  in  accordance  with  any  standards  approved  for  the  pur- 
pose by  that  ofificial. 

A  negotiable  receipt  issued  for  wool  stored  in  a  licensed  ware- 
house shall,  in  addition,  include  a  form  of  indorsement  which  may 
be  used  by  the  depositor  or  the  lawful  holder  of  the  receipt  or  the 
authorized  agent  of  either  for  showing  the  ownership  of,  and  liens, 
mortgages,  or  other  encumbrances  on,  the  wool  covered  by  the 
receipt. 

Duplicating  Receipts  Lost  or  Destroyed 

All  copies  of  receipts,  except  those  issued  in  lieu  of  the  original 
in  case  of  lost  or  destroyed  receipts,  shall,  if  there  be  no  statute  of 
the  United  States  or  law  of  a  State  providing  otherwise,  have  clearly 
and  conspicuously  printed  or  stamped  thereon  the  words  "Copy — 
Not  Negotiable." 

In  the  case  of  a  lost  or  destroyed  receipt,  if  there  be  no  statute 

-87- 


of  the  United  States  or  law  of  a  State  applicable  thereto,  a  new  re- 
ceipt upon  the  same  terms  and  conditions,  and  bearing-  on  its  face 
the  number  and  date  of  the  receipt  in  lieu  of  which  it  is  issued  and 
a  statement  that  it  is  a  duplicate  issued  in  lieu  of  a  lost  receipt, 
may  be  issued  upon  compliance  with  the  provisions  set  forth  in 
the  following  paragraph : 

"Before  issuing  such  duplicate  receipt,  the  licensed  ware- 
houseman shall  require  the  depositor  or  other  person  applying 
therefor  to  make  and  file  with  the  warehouseman  (a)  an  affidavit 
showing  that  he  is  lawfully  entitled  to  the  possession  of  the 
original  receipt,  that  he  has  not  negotiated  or  assigned  it,  how 
the  original  receipt  was  lost  or  destroyed,  and,  if  lost,  that  dili- 
gent effort  has  been  made  to  find  the  receipt  without  success, 
and  (b)  a  bond  in  an  amount  double  the  value,  at  the  time  the 
bond  is  given,  of  the  wool  represented  by  the  lost  or  destroyed 
receipt.  Such  bond  shall  be  in  a  form  approved  for  the  purpose 
by  the  Secretary,  shall  be  conditioned  to  indemnify  the  ware- 
houseman against  any  loss  sustained  by  reason  of  the  issuance 
of  such  duplicate  receipt,  and  shall  have  as  surety  thereon  (a) 
a  surety  company  which  is  authorized  to  do  business,  and  is  sub- 
ject to  service  of  process  in  a  suit  on  the  bond,  in  the  State  in 
which  the  warehouse  is  located,  or  (b)  at  least  two  individuals 
who  are  residents  of  such  State  and  each  of  whom  owns  real 
property  therein  having  a  value,  in  excess  of  all  exemptions  and 
encumbrances,  to  the  extent  of  double  the  amount  of  the  bond." 


Regulations  Covering  Delivery  of  Wool 

Section  5  of  Regulation  4,  covering  warehouse  receipts  for 
wool,  stipulates  that,  except  as  permitted  by  law  or  by  these  regu- 
lations, a  warehouseman  shall  not  deliver  the  wool  for  which  he 
has  issued  a  negotiable  receipt  until  the  receipt  has  been  returned 
to  him. 

If  a  warehouseman  deliver  a  part  only  of  a  lot  of  wool  for  which 
he  has  issued  a  negotiable  receipt,  he  shall  either  (a)  take  up  and 
cancel  such  receipt  and  issue  a  new  receipt  in  accordance  with  these 
regulations  for  the  undelivered  portion  of  the  wool,  or  (b)  shall 
have  plainly  placed  upon  the  back  of  the  receipt  an  indorsement 
showing  the  date  of  delivery,  the  kind  of  wool  delivered  and  the 
grade  and  weight  thereof,  and  upon  the  face  of  the  receipt  a  nota- 
tion that  partial  delivery  has  been  made  in  accordance  with  the  in- 

—  88  — 


dorsement  thereon.  Such  indorsement,  the  regulations  prescribe, 
shall  be  signed  by  the  person  lawfully  entitled  to  such  delivery,  or 
his  authorized  agent,  or  the  warehouseman  shall  obtain  from  such 
person  a  separate,  written  acknowledgment  of  the  delivery. 

A  warehouseman  shall  not,  except  as  permitted  by  law  or  by 
these  regulations,  deliver  the  wool  for  which  he  has  issued  a  non- 
negotiable  receipt  until  such  receipt  has  been  returned  to  him  or 
he  has  obtained  from  the  person  lawfully  entitled  to  such  delivery, 
or  his  authorized  agent,  a  written  acknowledgment  thereof. 

Where  a  warehouseman  delivers  a  part  only  of  a  lot  of  wool 
for  which  he  has  issued  a  non-negotiable  receipt,  he  shall  either 
(a)  comply  with  the  requirements  of  Section  5,  previously  given, 
as  far  as  applicable  to  partial  delivery,  or  (b)  obtain  from  the  per- 
son lawfully  entitled  to  such  partial  delivery,  or  his  authorized 
agent,  a  written  acknowledgment  thereof. 

If  a  warehouseman  issue  a  receipt  for  wool  the  identity  of 
which  is  to  be  preserved,  omitting  the  statement  of  grade  as  per- 
mitted by  Section  18  of  the  Act,  previously  summarized,  such  re- 
ceipt shall  bear  on  its  face  the  words  "No  grade  stated." 


Chapter  X 


THE  EDGE  EXPORT  FINANCE  ACT 


THE  Edge  Bill,  or  Edge  Export  Finance  Act,  was  introduced 
in  Congress  by  Senator  Edge  of  New  Jersey  in  July,  1919, 
After  undergoing  some  modifications  in  both  the  House 
and  Senate,  the  bill  became  a  law  on  December  24,  1919,  upon  its 
approval  by  the  President. 

The  fundamental  purpose  of  this  bill  is  to  promote  the  foreign 
commerce  of  the  United  States.  Public  discussions  of  the  measure 
have  stressed  the  fact  that  under  its  provisions  the  business  interests 
of  this  country,  with  the  co-operation  of  investors,  are  enabled  to 
assist  in  the  reconstruction  of  Europe,  and  to  extend  long-term 
credits  to  foreign  buyers  of  American  goods  throughout  the  world. 
The  bill  has  a  wide  purpose,  and  is  really  designed  to  afford  a  method 
for  facilitating  at  all  times  the  financing  of  American  export  trade 
through  the  establishment  of  international  banking  or  financial  cor- 
porations operating  under  Federal  supervision. 

Authority   for   Formation   of   Corporations 

Authority  for  the  formation  of  such  corporations  is  contained 
in  Section  25  (a)  of  the  Federal  Reserve  Act.  This  section,  which 
is  entirely  new,  confers  broad  powers  upon  the  Federal  Reserve 
Board,  which  is  not  only  intrusted  with  the  jurisdiction  of  the  pro- 
cedure relating  to  the  organization  of  corporations  under  the  Act, 
but  is  also  authorized  to  regulate  their  operations  in  numerous 
important  respects.  The  new  legislation,  in  short,  calls  for  action 
by  the  Federal  Reserve  Board  in  order  that  its  terms  may  be 
carried  fully  into  effect. 

In  its  regulations  issued  in  March,  1920,  the  Board  has  laid 
down  specific  rules  for  the  conduct  of  corporations  formed  under 

—  90  — 


Section  25  (a),  and  has  expressly  stated  that  it  reserves  the  right 
to  amend  these  regulations  whenever  such  a  course  may  seem  de- 
sirable. The  policy  of  the  Board  will  be  to  promulgate  such  regu- 
lations from  time  to  time  as  it  may  consider  necessary  to  permit 
of  the  development  of  operations  under  the  provisions  of  the  Act 
in  the  manner  contemplated  by  Congress, 

How  Corporations  May  Be  Organized 

The  first  paragraph  of  Section  25  (a),  relating  to  the  organiza- 
tion of  corporations  under  the  Act,  reads  as  follows : 

"Corporations  to  be  organized  for  the  purpose  of  engaging 
in  international  or  foreign  banking  or  other  international  or 
foreign  financial  operations,  or  in  banking  or  other  financial 
operations  in  a  dependency  or  insular  possession  of  the  United 
States,  either  directly  or  through  the  agency,  ownership,  or  con- 
trol of  local  institutions  in  foreign  countries,  or  in  such  depen- 
dencies or  insular  possessions  as  provided  by  this  section,  and  to 
act  when  required  by  the  Secretary  of  the  Treasury  as  fiscal 
agents  of  the  United  States,  may  be  formed  by  any  number  of 
natural  persons,  not  less  in  any  case  than  five." 

The  next  succeeding  paragraph  stipulates  that  such  persons 
shall  enter  into  articles  of  association,  specifying  in  general  terms 
the  objects  for  which  the  association  is  formed.  These  articles 
may  also  contain  any  other  provisions  not  inconsistent  with  law 
which  the  Corporation*  may  choose  to  adopt  for  the  regulation  of 
its  business  and  the  conduct  of  its  affairs.  All  of  the  persons  intend- 
ing to  participate  in  the  organization  of  the  Corporation  are 
required  to  sign  the  articles  of  association,  which  shall  then  be 
forwarded  to  the  Federal  Reserve  Board  and  filed  and  preserved 
in  its  office. 

The  Board  has  provided  a  form  (Form  151)  which  is  suggested 
as  a  satisfactory  form  of  articles  of  association. 


Form  of  Organization  Certificate 

The  persons  signing  the  articles  of  association  must  also  make 
an  organization  certificate  stating  the  name  assumed  by  the  Cor- 

•Whenever  the   word   Corporation   Is  spelled   with   a  capital   C,    it   refers   to   a   cor- 
poration   organized    under    Section    25    (a)    of    the    Federal    Reserve    Act. 

—  91  — 


poration,  which  shall  be  subject  to  the  approval  of  the  Federal 
Reserve  Board ;  the  place  or  places  where  its  operations  are  to  be 
carried  on ;  the  place  in  the  United  States  where  its  home  office  is 
to  be  located ;  the  amount  of  its  capital  stock  and  the  number  of 
shares  into  which  the  same  shall  be  divided ;  and  the  names  and 
places  of  business  or  residence  of  the  persons  executing  the  cer- 
tificate and  the  number  of  shares  to  which  each  has  subscribed. 
The  organization  certificate  must  also  state  that  it  is  made  to 
enable  the  persons  subscribing  the  same,  and  all  other  persons, 
firms,  companies,  and  corporations,  who  or  which  may  thereafter 
subscribe  to  or  purchase  shares  of  the  capital  stock  of  such  Cor- 
poration, to  avail  themselves  of  the  advantages  of  the  Act. 

The  Federal  Reserve  Board  has  provided  a  form  (Form  152) 
for  this  purpose.  After  the  persons  signing  the  organization  cer- 
tificate have  acknowledged  the  execution  thereof  before  a  judge 
of  some  court  of  record  or  notary  public,  the  certificate  shall  be 
forwarded  to  the  Federal  Reserve  Board  to  be  filed  in  its  office. 

Authority  to  Commence  Business 

In  its  regulations  covering  Section  25  (a),  the  Federal  Reserve 
Board  has  ruled  that  no  Corporation  which  issues  its  own  bonds, 
debentures,  or  other  such  obligations  will  be  permitted  to  have  the 
word  "bank"  as  a  part  of  its  title,  and  that  no  Corporation  which 
has  the  word  "Federal"  in  its  title  will  be  permitted  also  to  have 
the  word  "bank"  as  a  part  of  its  title.  The  title  of  the  Corpora- 
tion, so  far  as  possible,  should  indicate  the  nature  of  the  business 
contemplated,  and  should  not  resemble  the  name  of  any  other 
corporation  to  the  extent  that  it  might  result  in  misleading  the 
public  as  to  its  identity,  purpose,  connections,  or  affiliations. 

After  the  articles  of  association  and  organization  certificate 
have  been  approved  by  the  Federal  Reserve  Board,  a  preliminary 
permit  to  begin  business  will  be  issued.  Before  the  Board  will 
issue  its  final  permit  to  commence  business,  however,  the  president 
or  cashier  of  the  Corporation,  together  with  at  least  three  of  the 
directors,  must  certify: 

(a)  That  each  director  elected  is  a  citizen  of  the  United 
States. 

(b)  That  a  majority  of  the  shares   of  stock  is  owned  by 
citizens   of  the   United   States,   by   corporations   the   controlHng 

—  92  — 


interest  in  which  is  owned  by  citizens  of  the  United  States, 
chartered  under  the  laws  of  the  United  States,  or  by  firms  or 
companies  the  controlling  interest  in  which  is  owned  by  citizens 
of  the  United   States. 

(c)  That  of  the  authorized  capital  stock  specified  in  the 
articles  of  association  at  least  25  per  cent,  has  been  paid  in  in 
cash  and  that  each  shareholder  has  individually  paid  in  in  cash  at 
least  25  per  cent,  of  his  stock  subscription. 

When  these  requirements  have  been  met,  the  cashier  shall 
thereafter  certify  to  the  payment  of  the  remaining  installments  as 
and  when  each  is  paid  in. 

No  Corporation  may  be  organized  with  a  capital  stock  of  less 
than  $2,000,000,  and  none  will  be  permitted  to  issue  stock  of  no 
par  value.  In  the  articles  of  association,  the  par  value  of  each 
share  of  stock  must  be  specified ;  if  there  is  more  than  one  class  of 
stock,  the  name  and  amount  of  each  class,  and  the  obligations, 
rights,  and  privileges  attaching  thereto  shall  be  set  forth  fully. 
The  purpose  is  to  have  each  class  of  stock  so  named  as  to  indicate 
to  the  investor,  as  nearly  as  possible,  what  is  its  character,  and  to 
put  him  on  notice  of  any  unusual  attributes. 


Rules  Governing  Transfers  of  Stock 

The  Federal  Reserve  Board,  exercising  the  authority  con- 
ferred upon  it  by  law,  has  promulgated  somewhat  extended  regu- 
lations governing  the  transfer  of  the  stock  of  any  Corporation 
formed  under  Section  25  (a),  and  has  ruled  that  shares  of  stock 
shall  be  issuable  and  transferable  only  on  the  books  of  the  Cor- 
poration. 

It  is  expressly  stipulated  in  these  regulations  that  every  appli- 
cation for  the  issue  or  transfer  of  stock  shall  be  accompanied  by  an 
affidavit  of  the  party  to  whom  it  is  desired  to  issue  or  transfer 
stock,  or  by  his  or  its  duly  authorized  agent,  stating,  in  the  case  of 
an  individual,  whether  or  not  he  is  a  citizen  of  the  United  States, 
and  if  a  citizen  of  the  United  States,  whether  he  is  a  natural-born 
citizen  or  a  citizen  by  naturalization.  If  the  latter,  the  individual 
must  state  whether  he  remains  for  any  purpose  in  the  allegiance 
of  any  foreign  sovereign  or  government.  He  must  also  make 
known  whether  or  not  there  is  any  arrangement  under  which  he  is 

—  93  — 


to  hold  the  shares  or  any  of  the  shares  which  he  desires  to  have 
issued  or  transferred  to  him,  in  trust  for  or  in  any  way  under  the 
control  of  any  foreign  State  or  any  foreigner,  foreign  corporation, 
or  any  corporation  under  foreign  control.  If  such  an  arrangement 
exists,  the  nature  thereof  must  be  specified. 

The  same  general  regulations  apply  in  the  case  of  a  corpora- 
tion, or  of  a  firm  or  company.  If  a  corporation  is  not  chartered 
under  the  laws  of  the  United  States  or  of  a  State  of  the  United 
States,  no  further  declaration  is  required ;  but  if  a  corporation  is 
chartered  under  those  laws  it  must  be  declared  whether  or  not  the 
controlling  interest  in  such  corporation  is  owned  by  citizens  of  the 
United  States.  Where  the  issue  or  transfer  of  stock  afifects  a  firm 
or  company,  it  must  be  stated  whether  or  not  the  controlling  interest 
in  such  firm  or  company  is  owned  by  citizens  of  the  United  States. 
In  both  cases,  as  in  the  case  of  an  individual,  there  must  be  a 
declaration  as  to  whether  any  arrangement  exists  for  holding  the 
shares  in  trust  for  or  in  any  way  under  the  control  of  foreign 
interests. 


Stock  Held  Contrary  to  Law 

It  is  further  provided  in  the  regulations  of  the  Federal  Reserve 
Board  that  the  board  of  directors  of  any  Corporation  organized 
under  Section  25  (a)  may,  before  making  any  issue  or  transfer  of 
stock,  require  such  additional  evidence  as  they  may  deem  necessary 
in  order  to  determine  whether  or  not  the  issue  or  transfer  of  the 
stock  would  result  in  a  violation  of  the  law.  The  decision  of  the 
board  of  directors  shall  in  each  case  be  final  and  conclusive.  No 
issue  or  transfer  of  stock  which  would  cause  50  per  cent,  or  more 
of  the  total  amount  of  stock  issued  or  outstanding  to  be  held  con- 
trary to  the  provisions  of  the  law  shall  be  made  upon  the  books 
of  the  Corporation.  On  this  point,  the  regulations  of  the  Federal 
Reserve  Board  read  as  follows : 

"If  at  any  time,  by  reason  of  the  fact  that  the  holder  of  any 
shares  of  the  Corporation  ceases  to  be  a  citizen  of  the  United 
States,  or,  in  the  opinion  of  the  board  of  directors,  becomes  sub- 
ject to  the  control  of  any  foreign  State  or  foreigner  or  foreign 
corporation  or  corporation  under  foreign  control,  50  per  cent,  or 
more  of  the  total  amount  of  capital  stock  issued  or  outstanding 
is  held  contrary  to  the  provisions  of  the  law  or  these  regulations, 

—  94  — 


the  board  of  directors  may,  when  apprised  of  that  fact,  forthwith 
serve  on  the  holder  of  the  shares  in  question  a  notice  in  writing 
requiring  such  holder  within  two  months  to  transfer  such  shares 
to  a  citizen  of  the  United  States,  or  to  a  firm,  company,  or  cor- 
poration approved  by  the  board  of  directors  as  an  eligible  stock- 
holder. When  such  notice  has  been  given  by  the  board  of  direc- 
tors, the  shares  of  stock  so  held  shall  cease  to  confer  any  vote 
until  they  have  been  transferred  as  required  above,  and  if  on  the 
expiration  of  two  months  after  such  notice  the  shares  shall  not 
have  been  so  transferred,  the  shares  shall  be  forfeited  to  the 
Corporation." 


Investments  in  Other  Corporations 

The  first  paragraph  of  Section  25  (a),  as  previously  shown, 
provides  that  a  Corporation  formed  under  this  section  may  engage 
in  international  or  foreign  banking  or  other  international  or  for- 
eign financial  operations,  or  in  banking  or  other  financial  opera- 
tions in  a  dependency  or  insular  possession  of  the  United  States. 

No  Corporation  is  permitted  to  carry  on  any  part  of  its  busi- 
ness in  the  United  States,  except  such  as  may  be  incidental  to  its 
international  or  foreign  business.  With  the  approval  of  the  Fed- 
eral Reserve  Board,  agencies  may  be  established  in  the  United 
States  for  specific  purposes,  but  not  generally  to  carry  on  the 
business  of  the  Corporation.  In  no  case  shall  a  Corporation  estab- 
lish any  branches  except  with  the  approval  of  the  Federal  Reserve 
Board,  and  no  branch  may  be  established  in  the  United  States. 

It  being  contemplated  by  the  Act  that  a  Corporation  shall 
conduct  its  business  abroad,  either  directly  or  indirectly  through 
the  ownership  or  control  of  corporations,  it  is  accordingly  pro- 
vided that  a  Corporation  may  invest  in  the  stock,  or  other  certifi- 
cates of  ownership,  of  any  other  corporation  organized  under  the 
terms  of  Section  25  (a)  ;  under  the  laws  of  any  foreign  country  or 
a  colony  or  dependency  thereof;  or  under  the  laws  of  any  State, 
dependency,  or  insular  possession  of  the  United  States.  This  only 
applies,  however,  if  such  other  corporation  is  not  engaged  in  the 
general  business  of  buying  or  selling  goods  or  commodities  in  the 
United  States,  and  if  it  is  not  transacting  any  business  in  the 
United  States  except  such  as  is  incidental  to  its  international  or 
foreign  business. 

No  Corporation,  except  with  the  approval  of  the  Federal  Re- 

—  95  — 


serve  Board,  shall  invest  an  amount  in  excess  of  15  per  cent,  of  its 
capital  and  surplus  in  the  stock  of  any  corporation  engaged  in  the 
business  of  banking,  or  more  than  10  per  cent,  of  its  capital  and 
surplus  in  the  stock  of  any  other  kind  of  corporation.  Further- 
more, no  Corporation  is  permitted  to  purchase  stock  in  any  other 
corporation  organized  under  the  provisions  of  Section  25  (a)  or 
under  the  laws  of  any  State,  which  is  in  substantial  competition 
therewith,  or  which  holds  stock  or  certificates  of  ownership  in 
corporations  which  are  in  substantial  competition  with  the  pur- 
chasing Corporation.  The  Federal  Reserve  Board  points  out,  how- 
ever, that  this  restriction  does  not  apply  to  corporations  organized 
under  foreign  laws. 


Issue  of  Debentures  and  Other  Obligations 

By  the  terms  of  the  Act,  each  Corporation  is  authorized  to 
issue  debentures,  bonds,  and  promissory  notes  under  such  general 
conditions  as  to  security  and  limitations  as  the  Federal  Reserve 
Board  may  prescribe. 

The  approval  of  the  Board  is  necessary  before  a  Corporation  is 
privileged  to  make  any  public  or  private  issue  of  its  debentures, 
bonds,  notes,  or  other  such  obligations,  but  this  restriction  does 
not  apply  to  notes  issued  by  the  Corporation  in  borrowing  from 
banks  or  bankers  for  temporary  purposes  not  to  exceed  one  year. 
The  Federal  Reserve  Board  expressly  states  that  its  approval  will 
be  based  solely  upon  the  right  of  the  Corporation  to  make  the  issue 
of  debentures  or  other  obligations,  and  shall  not  be  understood  in 
any  way  to  imply  that  the  Board  has  approved  or  passed  upon  the 
merits  of  such  obligations  as  an  investment. 

In  determining  the  amount  of  debentures  or  other  such  obliga- 
tions which  may  be  issued  by  a  Corporation,  the  Board  will  con- 
sider the  general  character  and  scope  of  the  business  of  the  Cor- 
poration. 

Every  application  for  the  approval  of  an  issue  of  debentures 
or  other  such  obligations  by  a  Corporation  must  be  accompanied 
by  a  report  of  the  condition  of  the  Corporation  in  such  form  and 
as  of  such  date  as  the  Federal  Reserve  Board  may  require.  A  de- 
tailed list  of  the  securities  by  which  it  is  proposed  to  secure  such 
issue  must  also  be  given,  together  with  a  statement  of  their  ma- 

—  96  — 


turities,  indorsements,  guaranties,  or  collateral,  if  any,  and  in  gen- 
eral terms  the  nature  of  the  transaction  or  transactions  upon  which 
they  were  based.  There  must  also  be  furnished  such  other  data 
as  the  Federal  Reserve  Board  may  from  time  to  time  require. 

In  advertising  the  issue  of  the  obligations  of  a  Corporation,  no 
circular,  letter,  or  other  document  shall  contain  any  reference  to 
the  fact  that  the  Federal  Reserve  Board  has  granted  its  approval 
of  the  issue  to  which  the  advertisement  relates.  The  Board  has 
served  notice  that  this  regulation  will  be  strictly  enforced,  so  that 
there  may  be  no  possibility  of  such  a  reference  being  construed  as 
an  approval  by  the  Federal  Reserve  Board  of  the  merits  or  desir- 
ability of  the  obligations  as  an  investment. 


Sale  of  Foreign  Securities 

If  the  approval  of  the  Board  is  obtained,  a  Corporation  may 
offer  for  sale  foreign  securities  with  its  indorsement  or  guaranty, 
but  such  approval,  if  granted,  shall  not  be  understood  in  any  way 
to  imply  that  the  Federal  Reserve  Board  has  approved  or  passed 
upon  the  merits  or  desirability  of  such  securities  as  an  investment. 

Where  application  for  the  approval  of  such  sale  is  made,  it 
must  be  accompanied  by  a  statement  of  the  character  and  amount 
of  the  securities  proposed  to  be  sold,  their  indorsements,  guaranties, 
or  collateral,  if  any,  and  such  other  data  as  the  Board  may  require. 

As  in  the  case  of  the  issue  of  debentures  or  other  such  obliga- 
tions, no  circular,  letter,  or  other  document  advertising  the  sale  of 
foreign  securities  by  a  Corporation  with  its  indorsement  or  guar- 
anty shall  contain  any  reference  to  the  fact  that  the  Federal  Re- 
serve Board  has  granted  its  approval  of  the  sale  of  the  securities  to 
which  the  advertisement  relates. 


Regulations  Governing  Acceptances 

Through  the  enactment  of  Section  25  (a),  a  Corporation  is 
permitted,  under  such  regulations  as  the  Federal  Reserve  Board 
may  prescribe,  to  purchase,  sell,  discount,  and  negotiate,  with  or 
without  its  indorsement  or  guaranty,  notes,  drafts,  checks,  bills  of 

—  97  — 


exchange,  acceptances,  including  bankers'  acceptances,  cable  trans- 
fers, and  other  evidences  of  indebtedness. 

The  regulations  of  the  Board  governing  such  operations  are 
given  in  detail  in  this  booklet  under  Chapter  VIII,  "Regulations  of 
the  Federal  Reserve  Board."  To  avoid  repetition,  they  are  omitted 
here.  In  brief,  however,  it  may  be  stated  that  these  regulations 
permit  a  Corporation  to  accept,  subject  to  substantially  the  same 
conditions  as  are  imposed  by  law  upon  member  banks,  drafts  drawn 
by  banks  or  bankers  located  in  foreign  countries,  or  dependencies  or 
insular  possessions  of  the  United  States  for  the  purpose  of  fur- 
nishing dollar  exchange  as  required  by  the  usages  of  trade  in  those 
countries,  dependencies,  or  possessions.  These  regulations  are 
covered  by  Regulation  K,  Series  of  1920. 


Deposits  and  Reserve  Required 

Among  the  powers  conferred  upon  a  Corporation  by  Section 
25  (a)  is  that  of  receiving  deposits  outside  of  the  United  States, 
and  of  receiving  such  deposits  within  the  United  States  as  may  be 
incidental  to  or  for  the  purpose  of  carrying  out  transactions  in 
foreign  countries  or  dependencies  or  insular  possessions  of  the 
United  States. 

The  Federal  Reserve  Board  has  ruled  that  outside  the  United 
States  a  Corporation  may  receive  deposits  of  any  kind  from  indi- 
viduals, firms,  banks,  or  other  corporations.  It  is  expressly  stipu- 
lated, however,  that  if  a  Corporation  has  any  of  its  bonds,  deben- 
tures, or  other  such  obligations  outstanding  it  may  receive  abroad 
only  such  deposits  as  are  incidental  to  the  conduct  of  its  exchange, 
discount,  or  loan  operations. 

In  the  United  States,  no  Corporation  shall  receive  any  deposits 
except  such  as  are  identified  with  the  carrying  out  of  transactions 
in  foreign  countries  or  dependencies  of  the  United  States  where  the 
Corporation  has  established  agencies,  branches,  correspondents,  or 
where  it  operates  through  the  ownership  or  control  of  subsidiary 
corporations.  Deposits  of  this  character,  the  Federal  Reserve 
Board  has  ruled,  may  be  made  by  individuals,  firms,  banks,  or 
other  corporations,  whether  foreign  or  domestic,  and  may  be  time 
or  demand  deposits. 

The  regulations  governing  reserves  against  deposits  received 


in  the  United  States  stipulate  that  a  reserve  of  not  less  than  13 
per  cent,  must  be  maintained  against  all  such  deposits.  This  re- 
serve may  consist  of  cash  in  vault,  a  balance  with  the  Federal  re- 
serve bank  of  the  district  in  which  the  head  office  of  the  Corpora- 
tion is  located,  or  a  balance  with  any  member  bank.  In  the  matter 
of  deposits  received  abroad,  the  regulations  require  that  reserves 
against  such  deposits  be  governed  by  local  laws,  and  by  the 
dictates  of  sound  business  judgment  and  banking  principles. 


General   Limitations  and   Restrictions 

Exercising  the  power  conferred  upon  it  to  fix  such  general 
limitations  and  restrictions  as  may  be  deemed  necessary,  the  Fed- 
eral Reserve  Board  has  ruled  that  the  total  liabilities  to  a  Cor- 
poration of  any  person,  company,  firm,  or  corporation  for  money 
borrowed,  including  in  the  liabilities  of  a  company  or  firm  the 
liabilities  of  the  several  members  thereof,  shall  at  no  time  exceed 
10  per  cent,  of  the  amount  of  its  subscribed  capital  and  surplus, 
except  with  the  approval  of  the  Board. 

It  is  stated,  however,  that  the  discount  of  bills  of  exchange 
drawn  in  good  faith  against  actually  existing  values,  and  the  dis- 
count of  commercial  or  business  paper  actually  owned  by  the 
person  negotiating  the  same,  shall  not  be  considered  as  money 
borrowed  within  the  meaning  of  this  regulation.  The  Board  has 
also  decided  that  the  liability  of  a  customer  on  account  of  an 
acceptance  made  by  the  Corporation  for  his  account  is  not  a  liability 
for  money  borrowed  within  the  meaning  of  this  regulation  unless 
and  until  he  fails  to  place  the  Corporation  in  funds  to  cover  the 
payment  of  the  acceptance  at  maturity,  or  unless  the  Corporation 
itself  holds  the  acceptance. 

Except  with  the  approval  of  the  Federal  Reserve  Board,  the 
aggregate  liabilities  of  a  Corporation  outstanding  on  account  of 
acceptances,  average  domestic  and  foreign  deposits,  debentures, 
bonds,  notes,  guaranties,  indorsements,  and  other  such  obligations 
shall  not  exceed  at  any  one  time  ten  times  the  amount  of  the 
Corporation's  subscribed  capital  and  surplus.  In  determining  the 
amount  of  liabilities  within  the  meaning  of  this  regulation,  indorse- 
ments of  bills  of  exchange  having  not  more  than  six  months  to 

—  99  — 


run,   drawn  and  accepted  by  others  than  the   Corporation,   shall 
not  be  included. 

Advantages  of  New  Legislation 

From  the  foregoing  analysis  of  the  terms  of  the  Edge  Bill 
and  the  regulations  of  the  Federal  Reserve  Board  governing  the 
operations  of  corporations  organized  under  the  Act,  it  will  be 
apparent  that  important  new  legislation  has  been  provided  for  the 
promotion  of  the  foreign  commerce  of  the  United  States.  It  is 
not  the  intention  here  to  discuss  at  length  the  advantages  of  this 
bill,  but  merely  to  sum  up  in  a  general  way  the  manner  in  which 
its  provisions  may  be  utilized  for  the  purpose  of  facilitating 
American  export  trade. 

Adequate  machinery  for  the  financing  of  this  nation's  exports 
has  heretofore  been  lacking,  and  the  difficulty  of  meeting  the 
credit  requirements  of  foreign  buyers  has  been  an  impediment 
to  the  full  development  of  this  business.  In  the  present  period 
of  reconstruction  in  Europe,  there  is  a  special  need  for  some 
method  whereby  the  financing  of  American  exports  may  be  facili- 
tated, and  the  Edge  Bill  affords  a  practical  means  for  the  accom- 
plishment of  that  object.  To  what  extent  it  will  prove  effective, 
will  depend  mainly  upon  the  measure  of  support  which  the 
corporations  formed  under  the  Act  may  receive  from  investors  in 
this  country. 

Support  of  Investors  Essential 

That  the  support  of  investors  is  essential  to  the  successful 
operation  of  corporations  organized  under  the  Edge  Bill  may  be 
judged  from  the  fact  that  the  funds  which  such  corporations  may 
advance  to  foreign  purchasers  of  American  goods  must,  in  the  last 
analysis,  come  from  the  investing  public  here.  While  these  cor- 
porations may  extend  financial  accommodation  to  foreign  buyers, 
they  are  enabled  to  do  so  only  through  the  sale  of  their  own  de- 
bentures or  other  obligations  to  the  investors  of  this  country,  the 
money  so  raised  being  employed  in  paying  for  goods  exported  to 
purchasers  abroad.  Without  the  support  of  investors,  therefore, 
such  corporations  would  not  be  in  a  position  to  operate. 

—  100  — 


The  operations  of  these  corporations,  it  is  important  to  note, 
are  not  confined  to  Europe  alone ;  they  may  operate  in  any  and  all 
foreign  countries,  and  even  in  the  dependencies  and  insular  pos- 
sessions of  the  United  States.  The  number  of  these  corporations, 
moreover,  is  not  limited  by  law ;  any  number  of  them  may  be  in- 
corporated that  meet  the  provisions  of  the  Act  and  have  the  ap- 
proval of  the  Federal  Reserve  Board. 


Powers  of  Corporations  Varied 

As  previously  stated,  such  corporations  have  power,  subject  to 
the  regulations  of  the  Federal  Reserve  Board,  to  purchase,  sell, 
discount,  and  negotiate  notes,  drafts,  checks,  bills  of  exchange,  ac- 
ceptances, and  other  evidences  of  indebtedness.  They  may  also 
lend  and  borrow  money,  and  may  accept  deposits  within  certain 
specified  limitations.  These  corporations  have  authority,  in  short, 
to  conduct  general  banking  operations. 

An  essential  part  of  the  business  of  a  Corporation  formed  under 
the  Act,  as  has  already  been  shown,  is  the  offering  of  its  own 
debentures  or  other  obligations  to  the  investing  public.  Such  de- 
bentures or  other  obligations,  when  secured  by  collateral  satis- 
factory to  the  Federal  Reserve  Board,  may  be  sold  to  anyone  who 
may  care  to  purchase  them.  It  is  with  the  funds  obtained  through 
the  issue  of  its  debentures  or  other  obligations  that  the  Corpora- 
tion is  enabled  to  make  advances  to  foreign  buyers,  and  thus  aid  in 
the  financing  of  American  exports. 

After  the  passage  of  the  Edge  Bill,  its  sponsor,  Senator  Edge 
of  New  Jersey,  made  a  statement  in  explanation  of  the  purposes 
and  workings  of  the  Act,  and  this  statement  is  reproduced  herewith, 
in  part: 

"Now  that  the  so-called  Edge  Export  Finance  Bill  has  be- 
come a  law,  through  approval  by  the  President,  it  may  be  well  to 
call  attention  to  two  features  of  the  measure.  First,  it  is  not 
merely  and  solely  a  financial  measure,  and,  second,  it  is  not  com- 
pulsory. Sound  business  is  based  on  sound  finance,  and  the  new 
law  is  designed  to  strengthen  both  the  foundation  and  the  super- 
structure. It  provides  the  authority  and  procedure  for  financing 
the  American  export  trade,  but  it  compels  neither  the  Govern- 
ment nor  private  enterprise  to  embark  on  the  venture. 

"From  impoverished  purchasers,  an  export  finance  corpora- 

—  101  — 


tion  accepts  collateral  satisfactory  to  the  Federal  Reserve  Board, 
and  against  this  issues  debentures  for  sale  to  investors,  the 
money  so  raised  going  to  the  American  producers  or  exporters. 
Under  the  Federal  Reserve  Act,  banks  may  not  rediscount  paper 
of  more  than  90  days'  maturity;  under  the  Edge  Act,  paper  is  not 
rediscounted,  but  is  held  as  collateral  for  the  debentures. 
Finally,  through  government  supervision  exercised  by  the  Fed- 
eral Reserve  Board,  the  safety  of  all  transactions  is  assured 
throughout  as  far  as  is  humanly  possible — the  vendors  are  paid 
real  cash,  so  run  no  risk,  and  the  stockholders  of  the  corpora- 
tions and  the  purchasers  of  the  debentures  are  safeguarded  by 
the  Federal  Reserve  Board." 


102 


Chapter  XI 


THE  FEDERAL  BILL  OF  LADING  ACT 


THE  Federal  Bill  of  Lading  Act,  which  went  into  effect 
January  1,  1917,  renders  the  bill  of  lading  a  complete 
negotiable  instrument  and  prescribes  the  conditions  under 
which  it  shall  be  issued.  By  this  new  law,  the  liabilities  of  the 
railroads  are  more  clearly  defined  and  the  danger  of  loss  through 
fraudulent  bills  of  lading  is  much  lessened.  Rules  are  laid  down 
for  the  cancellation  of  spent  bills,  and  duplicate  bills  of  lading  are 
regulated.  This  Act  is  of  unusual  importance  to  the  business  and 
banking  world,  and  a  digest  of  it  is  here  given,  as  the  bill  of 
lading,  in  the  last  analysis,  is  not  only  a  receipt  for  goods  delivered, 
but  also  represents  the  ownership  and  is  the  basis  for  acceptances 
and  bills  of  exchange,  both  domestic  and  foreign. 

The  Act  governs  bills  of  lading  issued  by  any  common  car- 
rier for  the  transportation  of  goods  in  any  territory  of  the  United 
States,  or  the  District  of  Columbia,  or  from  a  place  in  a  State  to  a 
place  in  a  foreign  country,  or  from  one  State  to  another,  or  from 
a  place  in  one  State  to  a  place  in  the  same  State  through  another 
State  or  foreign  country. 

Two  Kinds  of  Bills  of  Lading  Defined 

Two  kinds  of  bills  of  lading  are  defined :  the  straight  bill  and 
the  order  bill. 

A  straight  bill  is  one  which  states  that  the  goods  are  con- 
signed or  destined  to  a  specified  person.  It  is  not  negotiable  and 
must  be  so  marked  by  the  carrier. 

An  order  bill  is  one  in  which  the  goods  are  consigned  to  the 
order  of  any  person,  and  is  always  negotiable,  unless  upon  its  face 
and  by  written  agreement  the  shipper  distinctly  specifies  to  the 
contrary.  Order  bills  may  not  be  issued  in  parts  or  sets  for  the 
transportation  of  goods  to  any  place  in  the  United  States  on  the 

—  103  — 


Continent  of  North  America,  except  Alaska  and  Panama.  If  so 
issued,  the  carrier  will  be  held  liable  to  anyone  who  purchases  a 
part  of  the  shipment  for  value  in  good  faith,  even  though  the  pur- 
chase be  made  after  the  delivery  of  the  goods.  Order  bills,  how- 
ever, may  be  issued  in  parts  or  sets  for  the  transportation  of  goods 
to  Alaska,  Panama,  Porto  Rico,  the  Philippines,  Hawaii,  or  foreign 
countries.  When  more  than  one  order  bill  is  issued  for  goods  to 
be  transported  within  the  boundaries  of  the  Continental  United 
States,  the  word  "duplicate,"  or  some  other  word  or  words  indi- 
cating that  the  bill  is  not  an  original,  must  be  placed  plainly  on 
the  face  of  each  bill,  except  the  one  first  issued.  A  bill  marked 
"duplicate"  makes  the  carrier  liable  only  to  the  extent  of  declaring 
that  it  is  a  true  copy  of  the  original.  The  insertion  in  an  order  bill 
of  the  name  of  a  person  to  be  notified  of  the  arrival  of  the  goods 
does  not  limit  its  negotiability. 


To  Whom  Carriers  May  Make  Delivery  of  Goods 

Carriers,  in  the  absence  of  a  lawful  excuse,  must  make  deliv- 
ery to  the  consignee  named  in  a  straight  bill,  and  to  the  holder  of 
an  order  bill  if  the  demand  is  accompanied  by  an  offer  to  satisfy 
the  carrier's  lawful  lien  upon  the  goods;  or  by  an  offer  to  sur- 
render the  bill,  properly  indorsed ;  or  by  a  willingness  to  sign  a 
receipt  for  the  delivery  of  the  goods. 

The  carrier  is  also  justified  in  delivering  the  goods  to  a  person 
lawfully  entitled  to  their  possession;  to  the  consignee  named  in  a 
straight  bill;  or  to  a  person  possessing  an  order  bill  which  states 
that  the  goods  are  to  be  delivered  to  his  order,  or  which  has  been 
indorsed  to  him,  or  in  blank,  by  the  consignee. 


Deliveries  for  Which  the  Carrier  Is  Liable 

A  carrier  is  liable  when  delivery  is  made  to  one  who  is  not 
lawfully  entitled  to  the  goods;  also  when  the  carrier  has  been 
requested  by  a  person  having  a  right  of  property  or  possession  not 
to  make  delivery;  or  when  informed  at  the  time  of  delivery  that 
it  was  to  a  person  not  lawfully  entitled  to  the  possession  of  the 

—  104  — 


goods,  provided  that  such  information  be  given  to  a  proper  agent 
of  the  carrier  in  time  to  stop  delivery. 

The  carrier  is  also  liable  w^hen  it  fails  to  take  up  and  cancel  an 
order  bill  on  delivery.  The  exceptions  are :  when  the  carrier  acts 
under  compulsion  of  legal  process,  or  if  the  bill  is  later  acquired 
for  value  in  good  faith;  and  when  it  fails  to  mark  the  bill  with  a 
description  of  the  partial  delivery. 

Any  alteration,  addition  or  erasure  in  a  bill,  if  made  without 
the  carrier's  authority,  is  void.  When  a  bill  is  lost,  stolen  or 
destroyed,  a  court  of  competent  jurisdiction  may  order  the  deliv- 
ery of  the  goods  upon  satisfactory  proof,  upon  an  indemnifying 
bond  being  given,  and  the  payment  of  the  carrier's  costs  and  coun- 
sel fees.  A  voluntary  indemnifying  bond  without  a  court  order 
is  binding,  but  it  will  not  relieve  the  carrier  from  liability  in  case 
the  order  bill  has  been  negotiated  for  value  without  notice  of 
delivery. 

A  carrier  is  liable  for  non-delivery  when  the  title  has  not  been 
transferred  to  the  carrier  by  the  consignor  or  consignee,  or  when 
the  carrier  has  no  lien  on  the  goods. 

When  the  goods  are  claimed  by  one  or  more  persons,  the 
carrier  may  require  all  known  claimants  to  interplead. 

A  carrier  is  not  liable  for  the  non-delivery  of  goods  if  he 
has  information  that  some  person  other  than  the  consignee  or 
holder  of  the  bill  has  a  claim  to  their  title  or  possession,  but  this 
limitation  continues  only  until  the  validity  of  the  adverse  claim 
is  determined. 


"Shipper's  Weight,  Load  and  Count" 

When  the  goods  are  loaded  by  the  carrier,  the  carrier  must 
count  the  packages,  when  it  is  package  freight,  and  must  ascer- 
tain the  kind  and  quantity  if  it  is  bulk  freight.  If  "Shipper's 
weight,  load  and  count"  is  inserted  in  a  bill  under  the  foregoing 
conditions,  such  insertion  will  be  held  to  be  void. 

If  the  shipper  loads  the  goods  and  the  bill  states  that  it  is 
the  shipper's  weight,  load  and  count,  the  carrier  must  ascertain 
the  kind  and  quantity  of  the  merchandise,  but  is  not  liable  for 
improper  loading  or  misdescription  of  the  goods  in  the  bill  of 
lading. 

—  105  — 


Where  the  shipper  of  bulk  freig^ht  installs  adequate  facilities, 
and  makes  the  request  in  writing,  the  carrier  shall  ascertain  the 
kind  and  quantity  of  the  bulk  freight,  and,  upon  verification,  need 
not  insert  "Shipper's  weight,"  etc.,  in  the  bill. 


Rights  of  Creditors  to  Attach  Bills  of  Lading 

A  carrier  is  liable  for  the  acts  of  its  authorized  agent  to  the 
owner  of  goods  covered  by  a  straight  bill,  and  to  the  bona  fide 
holder  for  the  value  of  an  order  bill,  although  the  goods  may  not 
be  received  by  the  carrier  or  may  be  misdirected. 

While  in  possession  of  a  carrier,  goods  may  not  be  attached 
by  garnishment  or  otherwise,  unless  the  bill  is  first  surrendered 
to  the  carrier  or  its  negotiation  enjoined.  A  creditor  whose  debtor 
is  the  owner  of  an  order  bill  is  entitled  to  the  aid  of  courts  of 
jurisdiction  in  attaching  such  bill.  When  an  order  bill  is  issued, 
a  carrier  has  a  lien  on  the  goods  for  all  transportation  and  delivery 
charges.  After  the  goods  have  been  sold  to  satisfy  that  lien,  or 
when  goods  have  not  been  claimed,  or  when  they  are  perishable  or 
hazardous,  the  carrier  is  not  liable  for  delivery. 


Negotiating  or  Transferring  Bills  of  Lading 

An  order  bill  may  be  negotiated  by  tlie  indorsement  of  the 
person  to  whose  order  the  goods  are  deHverable,  which  indorse- 
ment may  be  in  blank  or  to  some  specified  person.  Subsequent 
negotiation  may  be  made  in  like  manner. 

A  bill  may  be  transferred  by  the  holder  by  delivery,  accom- 
panied by  an  express  or  implied  agreement  to  transfer  title  to  the 
bill  or  to  the  goods  it  represents.  A  straight  bill  cannot  be  nego- 
tiated free  from  existing  equities. 

An  order  bill  may  be  negotiated  by  any  person  who  possesses 
it,  if  by  the  terms  of  the  bill  the  carrier  undertakes  to  deliver  the 
goods  to  the  order  of  such  person,  or  if  at  the  time  of  negotiation 
the  bill  is  in  such  form  that  it  may  be  negotiated  by  delivery. 

The  person  to  whom  an  order  bill  has  been  duly  negotiated 
acquires  thereby  such  title  to  the  goods  as  held  by  the  negotiation, 
the  consignor  or  the  consignee. 

—  106  — 


The  person  to  whom  a  bill  has  been  transferred,  but  not 
negotiated,  acquires  thereby  as  against  the  transferor  of  the  title 
to  the  goods,  subject  to  the  terms  of  any  agreement  with  the  trans- 
feror. If  it  is  a  straight  bill,  such  person  has  the  right  to  notify 
the  carrier  of  the  transfer,  and  thereby  becomes  the  direct  obligee 
of  the  carrier's  obligations.  A  transfer,  however,  may  be  defeated 
by  garnishment  by  a  creditor,  or  by  prior  notification  to  the 
carrier  of  a  subsequent  sale  of  the  goods  by  the  transferor,  which 
notification,  however,  must  be  made  within  a  reasonable  time. 

Where  an  order  bill  is  transferred  for  value  by  delivery,  the 
transferee  acquires  right  against  the  transferor  to  compel  him  to 
indorse  the  bill  when  this  is  essential  for  negotiation. 


Warrants,  Indorsements,  Rights  and  Remedies 

A  person  who  negotiates  or  transfers  for  value  a  bill  by  indorse- 
ment or  delivery,  unless  a  contrary  intention  appears,  warrants: 
that  the  bill  is  genuine;  that  he  has  a  legal  right  to  transfer  it; 
that  he  has  knowledge  of  no  fact  which  would  impair  the  validity 
or  worth  of  the  bill ;  and  that  he  has  a  right  to  transfer  the  title  to 
the  goods. 

The  indorsement  of  a  bill  does  not  make  the  indorser  liable 
for  obligations  of  prior  indorsers  or  for  any  failure  on  the  part 
of  the  carrier  to  fulfill  their  respective  obligations. 

A  mortgagee  or  pledgee  or  other  holder  demanding  payment 
of  a  debt  is  not  deemed  by  so  doing  to  warrant  the  genuineness 
of  the  bill  held  as  security,  or  the  quantity  or  the  quality  of  the 
goods. 

The  validity  of  the  negotiation  of  a  bill  is  not  impaired  when 
received  in  good  faith  for  value,  even  though  the  negotiation  was 
a  breach  of  duty,  or  if  the  owner  should  have  been  deprived  of 
the  bill  by  fraud,  accident,  mistake,  duress,  loss,  theft  or  con- 
version. 

Where  a  person  has  sold,  mortgaged  or  pledged  goods  which 
are  in  the  carrier's  possession,  covered  by  an  order  bill,  or  has 
done  so  while  the  order  bill  representing  the  goods  continues  in 
his  own  possession,  the  subsequent  negotiation  by  that  person 
has  the  same  effect  as  if  the  first  purchaser  of  the  goods  or  bill 
had  expressly  authorized  the  subsequent  negotiation. 

—  107  — 


No  lien  or  right  of  stoppage  in  transit  defeats  the  right  of 
a  purchaser  of  an  order  bill  in  good  faith.  The  carrier  is  not 
justified  in  delivering  the  goods  to  an  unpaid  seller  unless  the 
bill  is  first  surrendered  for  cancellation.  The  rights  and  remedies 
of  a  mortgagee  or  lien  holder  against  the  purchaser  of  a  bill  for 
value  are  not  limited,  except  as  above. 

Forgeries,  etc.,  are  to  be  judged  misdemeanors  punishable  by- 
imprisonment  not  exceeding  five  years,  or  by  fine  not  exceeding 
$5,000,  or  both. 


—  108  — 


APPLICATION  FOR  COMMERCIAL  LETTER  OF  CREDIT, 


...Jaaqary:  19th »  ISZI^ 1 9 

THE  AMERICAN  EXCHANGE  NATIONAL  BANK 

NEW  YORK. 
Gentlemen 

P'««se  ^^  by  *^'  your  COMMERCIAL   LETTER  OF  CREDIT  as  per  particulars  beloiw 

for  which  we  will  duly  sign  your  form  of  contract 

In  favor  of Messrs . .  John .  Doe  and  Company  ^  Yokohama >  Japan ._ 

Available  by  Drafts  on yOUjeeXV-es ;;r,T,^"pu« 

For  Account  of-iiessxs.  Henry.  .Jones.  And  Coinps_ny.^New_Y^^^ 

For  not  exceeding $10>000# . 

Drafts  Drawn  at  four_month6... sight 

Against  Shipment  Of  -general  merchandise freight  .prepaid 


Shipment  from Japan to We.w_York. 

Bill  of  Lading  to  be  dated  not  later  than April,  15 tll,_1921 

Marine  Insurance  to  be  effected  by shipper 

War  Insurance  to  be  effected  by V. . 


(  If  Insurance  ii  effected  by  applicant  please  state  names  of  Jtisuranct  Companies  and  give  Policy  Numieri.) 
All  Insurance  to  be  in  first  class  companies  and  policies  delivered  lo  you  ^required. 

DOCUMENTS  TO  ACCOMPANY  DRAFTS: 

Invoice ~.X —  Insurance  Certificates X.__ , 

Bills  of  Lading X Weight  Certincate.f. . 

Consular  Invoice X ^  .._____ 

Drafts  to  be  drawn  prior  to May..lst^  1921 »    .,_ _ _...,. _ 

Deliver  documents  when  received  by  you  ta -Henry  .JjOnes  afuLjCou  >.  JteKjIToXlC* _^ 

REMARKS 


Yours  truly, 

Henry  Jones  and  Company 

Form  of  Application  for  Commercial  Letter  of  Credit 


z^4e^J^nM/}m^0amrj}m^^ 


Jan. 


'^ 


ty^^et^^^r^f 


(0.0,000.00*- 


vi^fvxa^^^rii^E^v/s^j^^  %'  ^OOOOf 

.^^^J^/y^JANUABY  19th,  1921. 


o(cy^e^f^J     JOHN  DOE  AND  COMPANY, 

YOKOHAMA,  JAPAN. 

^<fe%yw;'^.^MESSRS.  HENRI  JONES  &  COMPANY,  NEVf  YORK,  N.  Y.  Jiy^n^^^wt^yn/' 


-TEN  THOUSAND. 


'/iW^~ 


-POUR  (4)  MONTHS- 


,a/^mm^    GENERAL  MERCHANDISE  PROM  JAPAN  TO  NEW  YORK.  '^FREIGI 


BY  SHIPPERS,  CERTIFICATES  TO  ACCOMPANY  DRAFTS. 


^A^y<^^^^u/e:/i^^^f'^(ki^^^?t^J(a!.^^^^  15TH,  1921. 


0yra^/?m^Mf^  "Qffa6/^i',a^fi4/'£^.(Sji^ML/Cjf^Q)0000lf—-'  ^ru^ 
^  V  MAY  IST,  1921. 


'H^nai^ioar^ 


Form  of  Commercial  Letter  of  Credit 


For  and  in  consideration  of  the  acceptance  by  THE  AMERICAN  EXCHANGE  NATIONAL 

BANK,  NEW  YORK,  of  our  draft  (s)  on  them  numbered  _-8.7. dated...  Jan ..   a4r»  JL9aL. 

payable . ^aai^Aoya.  Data,, .  at    TKfl  AmaTjcui  RxchangOL  Hatioaal 

Bft.n,^..,. JSaa ,Xo£3^^  H .  Y . 

for  ElejjBJi-_thQ.usaDd-.--£lr.fl-..iiuridxed,  .lDrJ:iy  r-t»o^  _00/ 100=1--=.;=^.  r^,^^^.;;^,,.^^  Dollars, 

{%X  1  >  &^L3ji-=z ),  as  part  of  the  same  transaction,  we  hereby  promise  and  igree,  on  or  before 

the  day  prior  to  the  due  date  of  said  draft  to  pay  in  New  York  funds  to  the  Bank  the  amount  payable 
by  the  said  Bank  thereon,  and  as  collateral  security  for  the  doe  and  punctual  performance  for  such  obli- 
gation, as  well  as  for  the  payment  of  any  and  every  debt  or  liabihty  of  every  nature  from  the  under- 
signed to  said  BapK  we  hereby  deposit  with  and  assign  and  transfer  to  said  Bank  the  following 
property : 


jalLYA-MJLi:ittE<aJtgjL£rQ»a  Italy. 


with  other  additional  collaterals  as  may  from  time  to  time  be  required  by  any  of  the  officers  of  said 
Bank,  and  which  the  undersigned  hereby  promises  to  furnish  on  demand.  And  the  undersigned  hereby 
gives  to  said  Bank,  or  its  assigns,  full  power  to  sell,  assign  or  deliver  the  whole  or  any  part  of 
said  collaterals,  or  any  substitute  therefor,  or  any  additions  thereto,  at  any  Brokers'  Exchange  or  else- 
where at  public  or  private  sale,  at  the  option  of  such  holder,  on  the  non-performance  of  any  of  the 
premises  herein  contained,  and  without  notice  of  amount  due  or  claimed  to  be  due,  without  demand 
of  payment,  without  advertisement  and  without  notice  of  the  time  or  place  of  sale,  each  and  every  of 
which  is  hereby  expressly  waived ;  and  on  any  such  sale,  the  Bank,  its  assigns  or  any  of  the  officers  of 
said  Bank,  may  purchase  on  its  own  account,  and  without  further  accountability  except  for  the  pur- 
chase price  thereof,  the  whole  or  any  part  of  the  property  sold  free  from  any  right  of  redemption  on  the 
part  of  the  undersigned,  which  right  is  hereby  waived  and  released. 

It  is  further  agreed;  that  any  surplus  arising  from  the  sale  of  said  collaterals  beyond  the  amount 
due  hereon,  shall  be  applicable  upon  any  claim  of  the  said  Bank  arising  directly  or  by  assignment 
against  the  undersigned  at  the  time  of  said  sale,  whether  the  same  be  then  due  or  not  due. 

And  it  is  further  agreed  that  any  moneys  or  properties,  at  any  time,  in  the  possession  of  THE 
AMERICAN  EXCHANGE  NATIONAL  BANK,  NEW  YORK,  belonging  to  any  of  the  parties  liable 
hereon  to  said  Bank,  and  any  deposits,  balance  of  deposits  or  other  sum  at  any  time  credited  by  or  due 
from  said  Bank  to  any  of  said  parties,  shall  at  all  times  be  held  and  treated  as  collateral  security  for  the 
payment  of  any  other  obligation,  indebtedness  or  liability  of  the  undersigned  to  the  said  Bank,  whether 
due  or  not  due,  and  said  Bank  may  at  any  time,  at  its  option,  set  ofif  the  amount  due  or  to  become 
due  hereon  or  any  Other  obligations  against  any  claim  of  any  of  said  parties  against  said  Bank. 

And  it  is  further  agreed  that  upon  the  non-performance  of  any  of  the  promises  herein  contained, 
that  any  and  all  claims  held  hy  the  said  Bank  at  such  time  and  arising  directly  or  by  assignment 
against  the  undersigned  shall  immediately  become  due  and  payable. 

It  is  also  agreed  that  said  collaterals  may  from  time  to  time,  by  mutual  consent,  be  exchanged 
for  others,  which  shall  also  be  held  by  said  Bank  on  the  terms  above  set  forth,  and  may  be  applied  to 
any  other  obligation  now  or  hereafter  to  be  incurred  by  the  undersigned  to  said  Bank,  whether  due 
or  to  become  due. 

The  rights  given  by  this  document  to  the  said  Bank  are  transferable  by  endorsement 

JOSSPH  SMITH  &  COMPAWY 
New  York ISJm&nLJSAjih,^ 19.21 


Form  of  Acceptance  Credit  Agreement 


in 

,-^ 

U  I 

N          g 

n 

2          J 

«> 

T 

111 

D 

1! 

0 

b. 

J 

1-  s 

8  s 

i 
s 

0 

5 

bl 

z 

I 
P 

8    °f 

-Aa 

1 

J       S  u 

s     5 

^    5; 

> 

O 

»         Q. 

(mU^IOoB^   iXKi 

NBI5) 



! 

ss 

0 

H  a 

f 

wH 

~  ^Nva  JO 

^OIx  Y  >/\ 

301 

(>IM» 

-»'H' 

3navA> 

~ 

il 

IV 

d 

1 

•<i 

S 

s^ 

3X^ 

a 

B 
s 

0 

tS 

— 

J 

u 

a 

S 

0 

1 

a 

3||3DD 

y 
* 

1 

0 

<ia< 

u 

u.2.'5 

0 

1 

fSa 

J 

lb  a 

z 

0  S  >■ 

0  < 

Z02 

Z 

O^'u, 

0 

m 

J      a 

Q   U   Q 

"%, 

i 

m 

2 

IDNflOD  aDNVXdHDDV  N\oi>iawv 
3Hi  Aa   CHAO^ddV  W>IOd 

30Nvid3oov  3av"ax 


^IS.  IS  DU-j  ON  THE  LAST  DATE 
STAMPED  BELOW 


F    ,25 


RETURN 
T0-_ 


rv2 


,a  BOOKS  .MBB^eCAOEOAne^ 


TriTosT^* 


RE^: 


loq? 


FORW\NaDD0,5m,3/78 


-"»ss?,^"«"": 


VC  23999 


/" 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


